What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-08 · 165 added, 88 removed, 181 unchanged (58% of the section changed)

1 unchanged sentence

Forward-Looking Statements

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1933, as amended, that involve risks and uncertainties.

You can identify forward-looking statements because they contain words such as “believes,” “expects,” “projects,” “may,” “would,” “should,” “seeks,” “intends,” “plans,” “estimates,” “anticipates” or similar expressions that relate to our strategy, plans or intentions.

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the status of our licensing and supply agreements, including our licensing revenue and overall profitability being substantially dependent on our agreement with Smithfield Foods, Inc.;

the impact of our debt service and repayment obligations under our debt instruments, including the effect on our ability to fund working capital, operations and make investments;

the impact of our debt service and repayment obligations under our Credit Agreement, including the effect on our ability to fund working capital, operations and make investments;

economic (including inflationary pressures like those currently being experienced);

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the ability to attract franchisees;

the impact of the minimum wage legislation on labor costs in New York State or other changes in labor laws, including regulations which could render a franchisor as a “joint employee” or the impact of our union contracts;

our ability to attract competent restaurant and managerial personnel;

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Our revenues are generated primarily from selling products under Nathan’s Branded Product Program, operating Company-owned restaurants, licensing agreements for the sale of Nathan’s products within supermarkets, grocery stores and club stores, the sale of Nathan’s products directly to other foodservice operators, 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 June 30, 2024, our restaurant system, excluding virtual kitchens, consisted of 231 locations, including 118 Branded Menu Program locations, and four Company-owned restaurants (including one seasonal unit), located in 17 states, and 13 foreign countries.

At June 25, 2023, our restaurant system, excluding virtual kitchens, consisted of 235 locations, including 121 Branded Menu Program locations, and four Company-owned restaurants (including one seasonal unit), located in 17 states, and 13 foreign countries.

At September 29, 2024, our restaurant system, excluding virtual kitchens, consisted of 243 locations, including 128 Branded Menu Program locations, and four Company-owned restaurants (including one seasonal unit), located in 17 states, and 13 foreign countries.

At September 24, 2023, our restaurant system, excluding virtual kitchens, consisted of 235 locations, including 117 Branded Menu Program locations, and four Company-owned restaurants (including one seasonal unit), located in 17 states, and 13 foreign countries.

Our primary focus is to expand the market penetration of the Nathan’s Famous brand by increasing the number of distribution points for our products across all of our business platforms, including our Licensing Program for distribution 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 restaurants and franchised locations, including virtual kitchens.

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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.

On November 1, 2017, the Company issued $150,000,000 of 6.625% Senior Secured Notes due 2025 (the “2025 Notes”) and used the majority of the proceeds of this offering to redeem the Company’s 10.000% Senior Secured Notes due 2020, paid a portion of a special $5.00 cash dividend and used the remaining proceeds for general corporate purposes, including working capital.

Over the past three years, we redeemed $90,000,000 of the 2025 Notes reducing the outstanding balance to $60,000,000 at June 30, 2024.

We believe that our multi-channel asset light business model will continue to generate consistent free cash flow to manage our current debt service levels and may enable us to further reduce our debt service levels in the future.

On May 1, 2024, the Company paid its first semi-annual interest payment on the 2025 Notes of $1,987,500 for fiscal 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.

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On July 10, 2024, the Company entered into a five-year unsecured Credit Agreement with Citibank, N.A.

and borrowed $60,000,000 in Term Loan borrowings to refinance and redeem the 2025 Notes.

See NOTE T – SUBSEQUENT EVENTS to the accompanying consolidated financial statements and “Liquidity and Capital Resources” for additional information on the Credit Agreement and refinancing.

Our future results may be impacted by our debt service and repayment obligations under our debt instruments.

and borrowed $60,000,000 in Term Loan borrowings to refinance and redeem the 6.625% Senior Secured Notes due 2025 (the “2025 Notes”).

See NOTE P – LONG TERM DEBT of the preceding consolidated financial statements and “Liquidity and Capital Resources” for additional information on the Credit Agreement and refinancing.

Our future results may be impacted by our debt service and repayment obligations under our Credit Agreement.

Inflationary Factors

Inflationary pressures impacted our results of operations during the first three months of fiscal 2025, including higher commodity prices on beef and beef trimmings.

We expect this trend to continue throughout the remainder of fiscal year 2025.

Inflationary pressures impacted our results of operations during the first half of fiscal 2025, including higher commodity prices on beef and beef trimmings.

This trend may continue throughout the remainder of fiscal year 2025.

In general, we have been able to offset cost increases resulting from inflation by increasing prices and adjusting product mix.

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(ii) provision for income taxes and (iii) depreciation and amortization expense.

The Company has also provided Adjusted EBITDA, a non-GAAP financial measure, which is defined as EBITDA, excluding share-based compensation that the Company believes will impact the comparability of its results of operations.

The Company has also provided Adjusted EBITDA, a non-GAAP financial measure, which is defined as EBITDA, excluding (i) the loss on debt extinguishment 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.

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Thirteen weeks ended

June 30, 2024

June 25, 2023

Twenty-six weeks ended

September 29,

September 24,

September 29,

September 24,

Interest expense

1 unchanged sentence

Depreciation and amortization

Loss on debt extinguishment

Share-based compensation

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Historically, sales from our Company-owned restaurants, principally at Coney Island, and franchised restaurants from which franchised royalties are earned and the Company’s earnings have been highest during our first two fiscal quarters, with the fourth quarter representing the slowest period.

Additionally, revenues from our Branded Product Program, Branded Menu Program and Product licensing program generally follow similar seasonal fluctuations, although not to the same degree.

Additionally, revenues from our Branded Product Program, Branded Menu Program and retail licensing program generally follow similar season fluctuations, although not to the same degree.

We expect that this seasonality will continue.

Working capital requirements may vary throughout the year to support these seasonal patterns.

Due to the above seasonal factors, as well as inflationary pressures, our results of operations for the thirteen weeks ended June 30, 2024 are not necessarily indicative of those for a full fiscal year.

Due to the above seasonal factors, as well as inflationary pressures, our results of operations for the thirteen and twenty-six weeks ended September 29, 2024 are not necessarily indicative of those for a full fiscal year.

Results of Operations

Thirteen weeks ended June 30, 2024 compared to thirteen weeks ended June 25, 2023

Total revenues increased by approximately 7% to $44,767,000 for the thirteen weeks ended June 30, 2024 (“fiscal 2025 period”) as compared to $41,985,000 for the thirteen weeks ended June 25, 2023 (“fiscal 2024 period”).

Foodservice sales from the Branded Product Program increased by approximately $976,000 to $26,146,000 during the fiscal 2025 period as compared to $25,170,000 for the fiscal 2024 period.

During the fiscal 2025 period, the total volume of hot dogs sold in the Branded Product Program was comparable to the fiscal 2024 period.

Our average selling price increased by approximately 3.5% as compared to the fiscal 2024 period.

Thirteen weeks ended September 29, 2024 compared to thirteen weeks ended September 24, 2023

Total revenues increased by approximately 6% to $41,109,000 for the thirteen weeks ended September 29, 2024 (“second quarter fiscal 2025”) as compared to $38,744,000 for the thirteen weeks ended September 24, 2023 (“second quarter fiscal 2024”).

Foodservice sales from the Branded Product Program increased by approximately 5% to $24,536,000 for the second quarter fiscal 2025 as compared to $23,352,000 for the second quarter fiscal 2024.

During the second quarter fiscal 2025, the volume of hot dogs sold in the Branded Product Program increased by approximately 4% as compared to the second quarter fiscal 2024.

Our average selling prices increased by approximately 1.4% as compared to the second quarter fiscal 2024.

Total Company-owned restaurant sales increased by approximately 3% to $5,348,000 during the second quarter fiscal 2025 as compared to $5,193,000 during the second quarter fiscal 2024.

Restaurant sales were impacted by higher sales at our Coney Island locations due to an increase in our average check, offset by lower sales at our locations in Oceanside and Yonkers, New York.

License royalties increased by approximately 14% to $9,491,000 in the second quarter fiscal 2025 as compared to $8,339,000 in the second quarter fiscal 2024.

Total royalties earned on sales of hot dogs from our license agreement with Smithfield Foods, Inc.

at retail and foodservice, increased 14% to $8,595,000 for the second quarter fiscal 2025 as compared to $7,507,000 in the second quarter fiscal 2024.

The increase is due to an 18% increase in retail volume which was offset, in part, by a 4% decrease in net selling price .

The foodservice business earned higher royalties of $39,000 as compared to the second quarter fiscal 2024.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $64,000 during the second quarter fiscal 2025 as compared to the second quarter fiscal 2024 primarily due to higher royalties earned on sales of proprietary spices, franks-in-a-blanket, mozzarella sticks and other hors d’oeuvres.

Franchise fees and royalties decreased by approximately 9% to $1,174,000 in the second quarter fiscal 2025 as compared to $1,291,000 in the second quarter fiscal 2024.

Total royalties were $1,066,000 in the second quarter fiscal 2025 as compared to $1,148,000 in the second quarter fiscal 2024.

Royalties earned under the Branded Menu Program were $248,000 in the second quarter fiscal 2025 as compared to $272,000 in the second quarter fiscal 2024.

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 $11,000 in the second quarter fiscal 2025 as compared to $18,000 in the second quarter fiscal 2024.

Traditional franchise royalties were $807,000 in the second quarter fiscal 2025 as compared to $858,000 in the second quarter fiscal 2024.

Franchise restaurant sales decreased to $18,681,000 in the second quarter fiscal 2025 as compared to $19,171,000 in the second quarter fiscal 2024 primarily due to lower traffic at international locations and other seasonal entertainment venues.

Comparable domestic franchise sales (consisting of 59 Nathan’s outlets, excluding sales under the Branded Menu Program) were $14,961,000 in the second quarter fiscal 2025 as compared to $15,286,000 in the second quarter fiscal 2024.

At September 29, 2024, 243 franchised locations, including domestic, international and Branded Menu Program units were operating as compared to 235 franchised locations, including domestic, international and Branded Menu Program units at September 24, 2023.

Total franchise fee income was $108,000 in the second quarter fiscal 2025 as compared to $143,000 in the second quarter fiscal 2024.

Domestic franchise fee income was $35,000 in the second quarter fiscal 2025 as compared to $28,000 in the second quarter fiscal 2024.

International franchise fee income was $59,000 in the second quarter fiscal 2025 as compared to $60,000 in the second quarter fiscal 2024.

We recognized $14,000 and $55,000 in forfeited fees in the second quarter fiscal 2025 and the second quarter fiscal 2024, respectively.

During the second quarter fiscal 2025, eighteen franchise locations opened and six franchise locations closed.

During the second quarter fiscal 2024, seven franchise locations opened and seven franchise locations closed.

Advertising fund revenue, after eliminating Company contributions, was $560,000 during the second quarter fiscal 2025 as compared to $569,000 during the second quarter fiscal 2024.

Costs and Expenses

Overall, our cost of sales increased by approximately 8% to $26,029,000 in the second quarter fiscal 2025 as compared to $24,187,000 in the second quarter fiscal 2024.

Our gross profit (calculated as total Branded Products sales plus total Company-owned restaurant sales less cost of sales) was $3,855,000 or 13% during the second quarter fiscal 2025 as compared to $4,358,000 or 15% during the second quarter fiscal 2024.

Cost of sales in the Branded Product Program increased by 9% to $23,318,000 in the second quarter fiscal 2025 as compared to $21,442,000 in the second quarter fiscal 2024, primarily due to a 4% increase in the volume of hot dogs sold, as well as a 5% increase in the average cost per pound of our hot dogs.

A shrinking supply of cattle, combined with industry demand and inflationary pressures have resulted in higher commodity prices, including beef and beef trimmings, contributing to the increase in the average cost per pound of our hot dogs.

We did not make any purchase commitments of beef during the second quarter fiscal 2025 or the second quarter fiscal 2024.

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 2025 was $2,711,000 or 51% of restaurant sales as compared to $2,745,000 or 53% of restaurant sales during the second quarter fiscal 2024.

Food and paper costs as a percentage of Company-owned restaurant sales were 24.2%, down from 27.6% in the comparable period of the prior year driven, in part, by price increases across most menu offerings.

Labor and related expenses as a percentage of Company-owned restaurant sales were 26.5%, up from 25.3% in the comparable period of the prior year due to higher salaries expense attributable to minimum wage increases as well as higher incentive compensation expense.

Restaurant operating expenses were $1,389,000 in the second quarter fiscal 2025 as compared to $1,340,000 in the second quarter fiscal 2024.

The increase is due primarily to higher occupancy expenses of $103,000 and higher insurance costs of $26,000 which were offset, in part, by lower marketing expenses of $23,000 and lower delivery charges of $23,000.

As a percentage of Company-owned restaurant sales, restaurant operating expenses were 26% in the second quarter fiscal 2025 as compared to 25.8% in the second quarter fiscal 2024.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, and the amortization of a definite-lived intangible asset, was $247,000 in the second quarter fiscal 2025 as compared to $315,000 in the second quarter fiscal 2024.

General and administrative expenses increased by $23,000 or 1% to $3,252,000 in the second quarter fiscal 2025 as compared to $3,229,000 in the second quarter fiscal 2024.

The increase in general and administrative expenses was primarily attributable to higher stock compensation expense of $47,000 and higher incentive compensation expense of $44,000 which were offset, in part, by lower professional fees of $39,000.

Advertising fund expense, after eliminating Company contributions, was $560,000 during the second quarter fiscal 2025 as compared to $569,000 in the second quarter fiscal 2024.

Interest expense of $1,441,000 in the second quarter fiscal 2025 represented interest expense of $458,000 and $930,000 on the 2025 Notes and the Secured Overnight Financing Rate (“SOFR”) Term Loan borrowings, respectively, and amortization of debt issuance costs of $35,000 and $18,000 on the 2025 Notes and the SOFR Term Loan borrowings, respectively.

Interest expense of $1,413,000 in the second quarter fiscal 2024 represented interest expense of $1,321,000 on the 2025 Notes and amortization of debt issuance costs of $92,000.

On July 10, 2024, the Company refinanced and redeemed its outstanding 2025 Notes.

In connection with this transaction, the Company recorded a loss on extinguishment of debt of $334,000 that reflected the write-off of the remainder of previously recorded debt issuance costs.

Interest and dividend income of $219,000 in the second quarter fiscal 2025 represented amounts earned by the Company on its interest bearing bank and money market accounts and mutual funds as compared to $150,000 in the fiscal 2024 period.

Other income, net was $23,000 in the second quarter fiscal 2025 and the second quarter fiscal 2024 which primarily relates to sublease income from a franchised restaurant.

Provision for Income Taxes

The effective income tax rate for the second quarter fiscal 2025 was 25.5% compared to 27.4% in the second quarter fiscal 2024.

The effective income tax rate for the second quarter fiscal 2025 reflected income tax expense of $2,069,000 recorded on $8,099,000 of pre-tax income.

The effective income tax rate for the second quarter fiscal 2024 reflected income tax expense of $2,153,000 recorded on $7,864,000 of pre-tax income.

The effective tax rates are higher than the U.S.

Federal statutory rates primarily due to state and local taxes as well as non-deductible compensation under the Internal Revenue Code Section 162(m).

The effective tax rate for the second quarter fiscal 2024 included a discrete adjustment of 0.8%.

The amount of unrecognized tax benefits at September 29, 2024 was $494,000 all of which would impact the Company’s effective tax rate, if recognized.

As of September 29, 2024, the Company had approximately $379,000 accrued for the payment of interest and penalties in conjunction with unrecognized tax benefits.

Nathan’s estimates that its unrecognized tax benefit excluding accrued interest and penalties could be further reduced by up to $46,000 during the fiscal year ending March 30, 2025 due primarily to the lapse of statutes of limitations which would favorably impact the Company’s effective tax rate, although no assurances can be given in this regard.

Results of Operations

Twenty-six weeks ended September 29, 2024 compared to twenty-six weeks ended September 24, 2023

Total revenues increased by approximately 6% to $85,876,000 for the twenty-six weeks ended September 29, 2024 (“fiscal 2025 period”) as compared to $80,729,000 for the twenty-six weeks ended September 24, 2023 (“fiscal 2024 period”).

Foodservice sales from the Branded Product Program increased by approximately 4% to $50,682,000 for the fiscal 2025 period as compared to $48,522,000 for the fiscal 2024 period.

During the fiscal 2025 period, the volume of hot dogs sold in the Branded Product Program increased by approximately 2% as compared to the fiscal 2024 period.

Our average selling prices increased by approximately 2.5% as compared to the fiscal 2024 period.

Total Company-owned restaurant sales increased by approximately 8% to $9,547,000 during the fiscal 2025 period as compared to $8,851,000 during the fiscal 2024 period.

Restaurant sales were impacted by an increase in our average check, as well as higher traffic at our two Company-owned restaurants in Coney Island.

Restaurant sales were impacted by higher sales at our Coney Island locations due to an increase in our average check, offset by lower sales at our location in Oceanside, New York.

License royalties increased by approximately 12% to $22,412,000 in the fiscal 2025 period as compared to $19,997,000 in the fiscal 2024 period.

Total royalties earned on sales of hot dogs from our license agreement with Smithfield Foods, Inc.

at retail and foodservice, increased 11% to $12,010,000 in the fiscal 2025 period as compared to $10,796,000 in the fiscal 2024 period.

The increase is due to an 11% increase in retail volume which was offset, in part, by a 0.5% decrease in net selling price.

at retail and foodservice, increased 13% to $20,605,000 for the fiscal 2025 period as compared to $18,303,000 in the fiscal 2024 period.

The increase is due to a 14% increase in retail volume which was offset, in part, by a 2% decrease in net selling price.

The foodservice business earned higher royalties of $107,000 as compared to the fiscal 2024 period.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $49,000 during the fiscal 2025 period as compared to the fiscal 2024 period primarily due to higher royalties earned on sales of French fries, onion rings, and proprietary spices offset, in part, by lower royalties earned on sales of franks-in-a-blanket, mozzarella sticks and other hors d’oeuvres.

Franchise fees and royalties were $1,073,000 in the fiscal 2025 period as compared to $1,075,000 in the fiscal 2024 period.

Royalties earned from all other licensing agreements for the manufacture and sale of Nathan’s products increased by $113,000 during the fiscal 2025 period as compared to the fiscal 2024 period primarily due to higher royalties earned on sales of French fries, onion rings, and proprietary spices, offset by lower royalties earned on sales of pickles, franks-in-a-blanket, mozzarella sticks and other hors d’oeuvres.

Franchise fees and royalties decreased by approximately 5% to $2,247,000 in the fiscal 2025 period as compared to $2,366,000 in the fiscal 2024 period.

Total royalties were $2,047,000 in the fiscal 2025 period as compared to $2,128,000 in the fiscal 2024 period.

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Traditional franchise royalties were $1,599,000 in the fiscal 2025 period as compared to $1,625,000 in the fiscal 2024 period.

Franchise restaurant sales increased to $17,653,000 in the fiscal 2025 period as compared to $17,263,000 in the fiscal 2024 period primarily due to higher sales at airport locations, shopping malls, and casino locations, primarily in Las Vegas, Nevada.

Comparable domestic franchise sales (consisting of 57 Nathan’s franchised restaurants, excluding sales under the Branded Menu Program) were $14,147,000 in the fiscal 2025 period as compared to $14,199,000 in the fiscal 2024 period.

At June 30, 2024, 231 franchised locations, including domestic, international and Branded Menu Program units were operating as compared to 235 franchised locations, including domestic, international and Branded Menu Program units at June 25, 2023.

Franchise restaurant sales decreased to $36,334,000 in the fiscal 2025 period as compared to $36,433,000 in the fiscal 2024 period primarily due to lower traffic at international locations, seasonal entertainment venues, and travel plazas which were offset, in part, by higher traffic at casino locations primarily in Las Vegas, Nevada.

Comparable domestic franchise sales (consisting of 58 Nathan’s outlets, excluding sales under the Branded Menu Program) were $29,037,000 in the fiscal 2025 period as compared to $29,388,000 in the fiscal 2024 period.

Total franchise fee income was $200,000 in the fiscal 2025 period as compared to $238,000 in the fiscal 2024 period.

Domestic franchise fee income was $58,000 in the fiscal 2025 period as compared to $55,000 in the fiscal 2024 period.

International franchise fee income was $60,000 in the fiscal 2025 period and the fiscal 2024 period.

We recognized $9,000 and $8,000 in forfeited fees in the fiscal 2025 and fiscal 2024 periods, respectively.

During the fiscal 2025 period, three franchise locations opened and two franchise locations closed.

During the fiscal 2024 period, seven franchise locations opened and four franchise locations closed.

Advertising fund revenue, after eliminating Company contributions, was $428,000 in the fiscal 2025 period as compared to $424,000 in the fiscal 2024 period.

International franchise fee income was $119,000 in the fiscal 2025 period as compared to $120,000 in the fiscal 2024 period.

We recognized $23,000 and $63,000 in forfeited fees in the fiscal 2025 period and fiscal 2024 period, respectively.

During the fiscal 2025 period, twenty-one franchise locations opened and eight franchise locations closed.

During the fiscal 2024 period, fourteen franchise locations opened and eleven franchise locations closed.

Advertising fund revenue, after eliminating Company contributions, was $988,000 during the fiscal 2025 period as compared to $993,000 during the fiscal 2024 period.

Costs and Expenses

Overall, our cost of sales increased by 2.3% to $25,241,000 in the fiscal 2025 period as compared to $24,684,000 in the fiscal 2024 period.

Our gross profit (calculated as total Branded Products sales plus total Company-owned restaurant sales less cost of sales) was $5,104,000 during the fiscal 2025 period as compared to $4,144,000 during the fiscal 2024 period.

Cost of sales in the Branded Product Program increased by approximately 2% to $22,972,000 in the fiscal 2025 period as compared to $22,568,000 in the fiscal 2024 period, primarily due to a 0.4% increase in the volume of hot dogs sold, as well as a 1.1% increase in the average cost per pound of our hot dogs.

A shrinking supply of cattle, combined with drought conditions, industry demand and inflationary pressures have resulted in higher commodity prices, including beef and beef trimmings, contributing to the increase in the average cost per pound of our hot dogs.

Overall, our cost of sales increased by approximately 5% to $51,270,000 in the fiscal 2025 period as compared to $48,871,000 in the fiscal 2024 period.

Our gross profit (calculated as total Branded Products sales plus total Company-owned restaurant sales less cost of sales) was $8,959,000 or 15% during the fiscal 2025 period as compared to $8,502,000 or 15% during the fiscal 2024 period.

Cost of sales in the Branded Product Program increased by 5% to $46,290,000 during the fiscal 2025 period as compared to $44,010,000 during the fiscal 2024 period, primarily due to a 2% increase in the volume of hot dogs sold, as well as a 3% increase in the average cost per pound of our hot dogs.

We did not make any purchase commitments of beef during the fiscal 2025 and 2024 periods.

With respect to Company-owned restaurants, our cost of sales during the fiscal 2025 period was $2,269,000 or 54% of restaurant sales, as compared to $2,116,000 or 58% of restaurant sales during the fiscal 2024 period.

With respect to Company-owned restaurants, our cost of sales during the fiscal 2025 period was $4,980,000 or 52% of restaurant sales, as compared to $4,861,000 or 55% of restaurant sales in the fiscal 2024 period.

Food and paper costs as a percentage of Company-owned restaurant sales were 24.8%, down from 27.8% in the comparable period of the prior year driven, in part, by price increases across most menu offerings.

Labor and related expenses as a percentage of Company-owned restaurant sales were 29%, down from 30% in the comparable period in the prior year due to increases in our average check and tighter management and staffing stabilization.

Labor and related expenses as a percentage of Company-owned restaurant sales were 27.4%, up from 27.1% in the comparable period of the prior year due to higher salaries expense attributable to minimum wage increases as well as higher incentive compensation expense.

Restaurant operating expenses were $2,518,000 in the fiscal 2025 period as compared to $2,383,000 in the fiscal 2024 period.

The increase is due primarily to higher occupancy expenses of $44,000, higher insurance costs of $28,000, and higher maintenance costs of $18,000.

The increase is due primarily to higher occupancy expenses of $147,000 and higher insurance costs of $54,000 which were offset, in part, by lower marketing expenses of $16,000 and lower delivery charges of $37,000.

As a percentage of Company-owned restaurant sales, restaurant operating expenses were 26.4% in the fiscal 2025 period as compared to 26.9% in the fiscal 2024 period.

Depreciation and amortization, which primarily consist of the depreciation of fixed assets, including leasehold improvements and equipment and the amortization of a definite-lived intangible asset, was $249,000 in the fiscal 2025 period as compared to $313,000 in the fiscal 2024 period.

General and administrative expenses decreased by $83,000 or 2% to $3,975,000 in the fiscal 2025 period as compared to $4,058,000 in the fiscal 2024 period.

The decrease in general and administrative expenses was primarily attributable to lower professional fees of $103,000, which were offset, in part, by higher salaries expense of $38,000 attributable to annual rate increases.

Advertising fund expense, after eliminating Company contributions, was $428,000 in the fiscal 2025 period as compared to $424,000 in the fiscal 2024 period.

Interest expense of $1,060,000 in the fiscal 2025 period represented interest expense of $991,000 on the 2025 Notes and amortization of debt issuance costs of $69,000.

Depreciation and amortization, which primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment, and the amortization of a definite-lived intangible asset, was $496,000 in the fiscal 2025 period as compared to $628,000 in the fiscal 2024 period.

General and administrative expenses decreased by approximately $60,000 or 1% to $7,227,000 in the fiscal 2025 period as compared to $7,287,000 in the fiscal 2024 period.

The decrease in general and administrative expenses was primarily attributable to lower professional fees of $142,000, which were offset, in part, by higher incentive compensation expense of $57,000 and higher share-based compensation expense of $58,000.

Advertising fund expense, after eliminating Company contributions, was $988,000 during the fiscal 2025 period as compared to $993,000 in the fiscal 2024 period.

Interest expense of $2,501,000 in the fiscal 2025 period represented interest expense of $1,449,000 and $930,000 on the 2025 Notes and the SOFR Term Loan borrowings, respectively, and amortization of debt issuance costs of $104,000 and $18,000 on the 2025 Notes and the SOFR Term Loan borrowings, respectively.

Interest expense of $2,827,000 in the fiscal 2024 period represented interest expense of $2,643,000 on the 2025 Notes and amortization of debt issuance costs of $184,000.

The reduction in interest expense of $354,000 is due to the reduction in the outstanding balance of the Company’s 2025 Notes from $80,000,000 at June 25, 2023 to $60,000,000 at June 30, 2024, as a result of the $20,000,000 partial redemption completed in December 2023.

On July 10, 2024, the Company refinanced and redeemed its outstanding 2025 Notes.

In connection with this transaction, the Company recorded a loss on extinguishment of debt of $334,000 that reflected the write-off of the remainder of previously recorded debt issuance costs.

Interest and dividend income of $297,000 in the fiscal 2025 period represented amounts earned by the Company on its interest bearing bank and money market accounts and mutual funds, as compared to $212,000 in the fiscal 2024 period.

Other income, net was $21,000 in the fiscal 2025 period and the fiscal 2024 period, which primarily relates to sublease income from a franchised restaurant.

Other income, net was $44,000 in the fiscal 2025 and fiscal 2024 periods which primarily relates to sublease income from a franchised restaurant.

Provision for Income Taxes

The effective income tax rate for the fiscal 2025 period was 27.4% as compared to 27.1% in the fiscal 2024 period.

The effective income tax rate for the fiscal 2025 period was 26.7% compared to 27.2% in the fiscal 2024 period.

The effective income tax rate for the fiscal 2025 period reflected income tax expense of $5,576,000 recorded on $20,883,000 of pre-tax income.

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The effective tax rates are higher than the statutory rates primarily due to state and local taxes as well as non-deductible compensation under the Internal Revenue Code Section 162(m).

The amount of unrecognized tax benefits at June 30, 2024 was $485,000 all of which would impact the Company’s effective tax rate, if recognized.

As of June 30, 2024, the Company had approximately $367,000 accrued for the payment of interest and penalties in conjunction with unrecognized tax benefits.

The amount of unrecognized tax benefits at September 29, 2024 was $494,000 all of which would impact the Company’s effective tax rate, if recognized.

As of September 29, 2024, the Company had approximately $379,000 accrued for the payment of interest and penalties in connection with unrecognized tax benefits.

Off-Balance Sheet Arrangements

At June 30, 2024 and June 25, 2023, Nathan’s did not have any open purchase commitments for hot dogs.

At September 29, 2024 and September 24, 2023, Nathan’s did not have any open purchase commitments for hot dogs.

Nathan’s may enter into purchase commitments in the future as favorable market conditions become available.

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Sources and uses of cash

Cash and cash equivalents at June 30, 2024 aggregated $25,979,000, a $4,952,000 increase during the fiscal 2025 period as compared to cash of $21,027,000 at March 31, 2024.

Net working capital increased to $30,763,000 at June 30, 2024 as compared to $23,203,000 at March 31, 2024.

Cash and cash equivalents at September 29, 2024 aggregated $31,207,000, a $10,180,000 increase during the fiscal 2025 period as compared to cash of $21,027,000 at March 31, 2024.

Net working capital increased to $32,618,000 at September 29, 2024 as compared to $23,203,000 at March 31, 2024.

Our primary sources of liquidity are cash flows from operations.

Our primary cash requirements are to fund our quarterly dividends, to satisfy the debt service under our debt instruments, capital expenditures, working capital and general corporate needs.

Our primary cash requirements are to fund our quarterly dividends, to satisfy the debt service under our debt instrument, capital expenditures, working capital and general corporate needs.

On May 1, 2024, we paid our first semi-annual interest payment on the 2025 Notes of $1,987,500 for the fiscal 2025 period.

On July 2, 2024, we paid our first quarterly cash dividend of fiscal 2025 of $2,043,000.

Cash flow for the fiscal year 2025 will be impacted by various factors, including, as discussed further below in this “Liquidity and Capital Resources” section, (i) debt issuance costs incurred in connection with our new Credit Agreement, (ii) mandatory debt repayments on our Term Loan borrowings under our new Credit Agreement, (iii) interest payments on our 2025 Notes and our Term Loan borrowings under our new Credit Agreement and (iv) expected dividend payments.

On August 13, 2024, in connection with the redemption of all of the outstanding $60,000,000 principal amount of its 2025 Notes, the Company paid its required interest payment of $1,137,000 on the redeemed 2025 Notes.

Subsequent to the quarter ending September 29, 2024, we paid our mandatory debt principal repayment of $600,000 on our Term Loan borrowings under the Credit Agreement.

Additionally, on October 10, 2024, we paid interest of $1,042,000 on our Term Loan borrowings and made a voluntary principal prepayment of $8,000,000 on our outstanding Term Loan borrowings.

On July 2, 2024 and September 6, 2024, we paid our first and second quarterly cash dividends of fiscal 2025 aggregating $4,085,000.

We expect to pay our third quarterly dividend on December 6, 2024.

Summary of Cash Flows

The following table presents a summary of our cash flows from operating and investing activities:

The following table presents a summary of our cash flows from operating, investing and financing activities:

(In thousands)

Twenty-six weeks ended

September 29,

September 24,

Net cash provided by operating activities

Net cash used in investing activities

Net cash used in financing activities

Net increase in cash and cash equivalents

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Cash provided by operations of $14,826,000 in the fiscal 2025 period is primarily attributable to net income of $15,307,000 in addition to other non-cash operating items of $1,278,000, offset by changes in other operating assets and liabilities of $1,759,000.

Non-cash operating expenses consist principally of depreciation and amortization of $249,000, amortization of debt issuance costs of $69,000, share-based compensation expense of $188,000, and a provision for credit losses of $65,000.

In the fiscal 2025 period, accounts and other receivables increased by $5,805,000 due primarily to higher Branded Product Program receivables of $2,131,000, higher franchise and license royalties receivable of $3,031,000 and higher receivables due to the Advertising Fund of $730,000.

Prepaid expenses and other current assets decreased by $578,000 due principally to a decrease in prepaid income taxes of $858,000 which was offset by an increase in prepaid real estate taxes of $61,000 and an increase in deferred financing costs of $265,000.

Accounts payable, accrued expenses and other current liabilities increased by $568,000 due principally to an increase in accounts payable due to the timing of seasonal product purchases for our Branded Product Program and Company-owned restaurants, as well as an increase in accrued rebates of $187,000 as a result of higher sales.

Additionally, there was an increase in accrued corporate taxes of $2,483,000 due to the timing of estimated tax payments and higher earnings, as well as an increase in dividends payable of $2,043,000 due to the timing of our first quarter fiscal 2025 dividend payment.

Offsetting these increases was a reduction in accrued payroll and other benefits of $2,027,000 resulting from the payment of year-end fiscal 2024 compensation as well as a reduction in accrued interest expense of $997,000 resulting from our May 2024 semi-annual interest payment on our 2025 Notes.

Non-cash operating expenses consist principally of depreciation and amortization of $496,000, amortization of debt issuance costs of $122,000, share-based compensation expense of $417,000, a loss on debt extinguishment of $334,000 and a provision for credit losses of $53,000.

In the fiscal 2025 period, accounts and other receivables increased by $994,000 due primarily to higher Branded Product Program receivables of $696,000, and higher receivables due to the Advertising Fund of $933,000 which were offset, in part, by lower franchise and license royalties receivable of $556,000.

Prepaid expenses and other current assets decreased by $1,370,000 due principally to a decrease in prepaid income taxes of $858,000, a decrease in prepaid insurance of $174,000 and a decrease in prepaid marketing and other expenses of $324,000.

Accounts payable, accrued expenses and other current liabilities decreased by $1,912,000 due to a decline in accrued payroll and other benefits of $1,609,000 resulting primarily from the payment of year-end fiscal 2024 incentive compensation;

earned deferred revenue of $775,000;

and a decline in accrued interest expense of $746,000 resulting primarily from our May 2024 semi-annual interest payment on our 2025 Notes.

Offsetting these decreases was an increase in accounts payable due to the timing of seasonal product purchases for our Branded Product Program and Company-owned restaurants.

Investing activities

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Financing activities

In connection with the Company’s refinancing of the 2025 Notes, the Company borrowed $60,000,000 in Term Loan borrowings pursuant to the Credit Agreement and simultaneously redeemed the 2025 Notes.

We incurred $431,000 of debt issuance costs in connection with this refinancing.

Additionally, the Company paid its first and second quarter cash dividends of $0.50 per share totaling $4,085,000.

Credit Facility

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The Company will use any Revolving Loan borrowings under the Credit Agreement for working capital and general corporate purposes.

See NOTE T – SUBSEQUENT EVENTS in the accompanying consolidated financial statements for additional information on the Credit Agreement.

See NOTE P – LONG TERM DEBT in the accompanying consolidated financial statements for additional information on the Credit Agreement.

Share Repurchases

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 June 30, 2024, Nathan’s has repurchased 1,101,884 shares at a cost of $39,000,000 under the sixth stock repurchase plan.

At June 30, 2024, there were 98,116 shares remaining to be repurchased pursuant to the sixth stock repurchase plan.

As of September 29, 2024, Nathan’s has repurchased 1,101,884 shares at a cost of $39,000,000 under the sixth stock repurchase plan.

At September 29, 2024, 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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There were no stock repurchases during the fiscal 2025 period.

We may return capital to our stockholders through stock repurchases, subject to any restrictions in our debt instruments including our new Credit Agreement, although there is no assurance that the Company will make any repurchases under its existing stock repurchase plan.

We may return capital to our stockholders through stock repurchases, subject to any restrictions in our new Credit Agreement, although there is no assurance that the Company will make any repurchases under its existing stock repurchase plan.

Common Stock Dividends

As discussed above, we had cash and cash equivalents at June 30, 2024 aggregating $25,979,000.

As discussed above, we had cash and cash equivalents at September 29, 2024 aggregating $31,207,000.

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

The Company paid its first quarterly cash dividend of fiscal 2025 of $2,043,000 on July 2, 2024.

Effective August 8, 2024, the Company declared its second quarter fiscal 2025 dividend of $0.50 per common share to stockholders of record as of the close of business on August 26, 2024, which is payable on September 6, 2024.

If the Company pays regular quarterly cash dividends for the remainder of fiscal 2025 at the same rate as declared in the first quarter of fiscal 2025, the Company’s total cash requirement for dividends for all of fiscal 2025 would be approximately $8,169,000 based on the number of shares of common stock outstanding at August 8, 2024.

The Company paid its first and second quarterly cash dividends of fiscal 2025 on July 2, 2024 and September 6, 2024 aggregating $4,085,000.

Effective November 7, 2024, the Company declared its third quarter fiscal 2025 dividend of $0.50 per common share to stockholders of record as of the close of business on November 25, 2024, which is payable on December 6, 2024.

If the Company pays regular quarterly cash dividends for the remainder of fiscal 2025 at the same rate as declared in the first and second quarter of fiscal 2025, the Company’s total cash requirement for dividends for all of fiscal 2025 would be approximately $8,169,000 based on the number of shares of common stock outstanding at November 7, 2024.

The Company intends to declare and pay quarterly cash dividends;

however, there can be no assurance that any additional quarterly dividends will be declared or paid or of the amount or timing of such dividends, if any.

Our ability to pay future dividends is limited by the terms of our debt instruments.

In addition, the payment of any cash dividends in the future are subject to final determination of the Board and will be dependent upon our earnings and financial requirements and the terms of our debt instruments.

Our ability to pay future dividends is limited by the terms of our Credit Agreement.

Cash Flow Outlook

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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 30, 2025, we expect to make cash interest payments of $3,125,000 on the 2025 Notes.

While our Credit Agreement bears interest at a fluctuating interest rate based on the Secured Overnight Financing Rate (“SOFR”) plus a spread adjustment, if the Company makes cash interest payments on the Term Loan borrowings at the interest rate established on the Effective Date, then during the fiscal year ended March 30, 2025, we expect to make cash interest payments of approximately $2,000,000 on the Term Loan borrowings.

We may from time to time seek to make voluntary prepayments of our debt instruments.

Such voluntary prepayments, if any, will depend on market conditions, our liquidity requirements, satisfactory compliance of conditions pursuant to our debt instruments and other factors.

Management believes that available cash 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.

During the fiscal year ending March 30, 2025, we made cash interest payments of $3,125,000 on the 2025 Notes.

While our Credit Agreement bears interest at a fluctuating interest rate based on SOFR plus a spread adjustment, if the Company makes its remaining fiscal year 2025 cash interest payments on its outstanding Term Loan borrowings at the interest rate effective at November 7, 2024, then during the fiscal year ended March 30, 2025, we expect to make cash interest payments of approximately $2,400,000 on the Term Loan borrowings.

We may from time to time seek to make voluntary prepayments of our Credit Agreement.

Subsequent to the quarter ending September 29, 2024, on October 10, 2024, we made a voluntary principal prepayment of $8,000,000 of Term Loan borrowings under our Credit Agreement.

Such voluntary prepayments, if any, will depend on market conditions, our liquidity requirements, satisfactory compliance of covenants and conditions pursuant to our Credit Agreement and other factors.

Management believes that available cash and cash equivalents and cash generated from operations should provide sufficient capital to finance our operations, satisfy our debt service requirements, fund dividend distributions and, if any, stock repurchases for at least the next 12 months.

Contractual Obligations

At June 30, 2024, we sublet one property to a franchisee that we lease from a third party.

At September 29, 2024, we sublet one property to a franchisee that we lease from a third party.

We remain contingently liable for all costs associated with this property including rent, property taxes and insurance.

We may incur future cash payments with respect to such property, consisting primarily of future lease payments, including costs and expenses associated with terminating such lease.

At June 30, 2024, our contractual obligations primarily consist of the 2025 Notes and the related interest payments, operating leases, and employment agreements with certain executive officers.

At September 29, 2024, our contractual obligations primarily consist of the Term Loan borrowings under our Credit Agreement and the mandatory debt principal repayments and the related interest payments, operating leases, and employment agreements with certain executive officers.

These contractual obligations impact our short-term and long-term liquidity and capital resource needs.

See NOTE P – LONG TERM DEBT, NOTE Q – LEASES, AND NOTE T – SUBSEQUENT EVENTS in the accompanying consolidated financial statements included in Part I, Item 1.

See NOTE P – LONG TERM DEBT and NOTE Q – LEASES in the accompanying consolidated financial statements included in Part I, Item 1.

for additional information.

Inflationary Pressures

Inflationary Impact

Inflationary pressures on commodity prices, most notably for beef and beef trimmings, have impacted our consolidated results of operations during the fiscal 2025 period, and this trend may continue through the remainder of fiscal year 2025.

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This impact will depend on our ability to manage such volatility through price increases and product mix.

We are unable to predict the future cost of our hot dogs and expect to experience price volatility for our beef products during fiscal 2025.

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 2025.

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

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We attempt to manage inflationary pressure, and rising commodity costs, at least in part, through raising prices.

Delays in implementing price increases, competitive pressures, a decline in consumer spending levels and other factors may limit our ability to offset these rising costs.

Delays in implementing price increases, competitive pressures, consumer spending levels and other factors may limit our ability to offset these rising costs.

Volatility in commodity prices, including beef and beef trimmings could have a significant adverse effect on our results of operations.

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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