Nathan's Famous, Inc. (NASDAQ:NATH) is a well-established quick-service restaurant chain and branded products company that has been a fixture in the American food landscape for over a century. Founded in 1916 on the iconic Coney Island boardwalk, Nathan's has grown from a single hot dog stand into a diversified business with multiple revenue streams across its Branded Products, Licensing, and Restaurant Operations segments.

History and Growth

The company's history is deeply intertwined with the rise of American popular culture. What began as a simple hot dog stand on the shores of New York quickly became a destination for beachgoers and tourists alike, establishing Nathan's as a quintessential part of the Coney Island experience. As the brand gained nationwide recognition, the company expanded its footprint, opening additional company-owned locations in the New York metropolitan area during the 1920s and 1930s. During this period, Nathan's also began licensing its brand name and products to third-party manufacturers, laying the groundwork for its future growth beyond restaurant operations.

The 1970s and 1980s presented significant challenges for Nathan's Famous, as the company faced financial difficulties and was forced to close many of its company-owned restaurants. However, the company demonstrated resilience by focusing on its licensing business, which had become an increasingly important part of its operations. This strategic pivot allowed Nathan's Famous products, including its signature hot dogs, to appear in supermarkets, grocery stores, and other retail outlets across the country.

The 1990s and 2000s marked a period of resurgence for Nathan's Famous. The company opened new company-owned restaurants and expanded its franchising program, while continuing to grow its licensing business through deals with major food manufacturers. This multi-pronged approach has resulted in the current system of 243 franchised and company-owned restaurants, including virtual kitchens, spanning 17 states and 13 foreign countries.

Current Business Model

Today, Nathan's operates a system of 243 franchised and company-owned restaurants, including virtual kitchens, spanning 17 states and 13 foreign countries. The company's Branded Product Program, which sells Nathan's proprietary hot dogs and other products to the foodservice industry, has become a significant revenue driver, accounting for over 50% of total sales. Additionally, Nathan's robust licensing agreements with major retailers and manufacturers have allowed the brand to extend its reach into the consumer packaged goods market, further solidifying its position as a household name.

Industry Challenges

Despite its storied history and diversified business model, Nathan's has not been immune to the challenges facing the food and restaurant industry. The company has navigated its fair share of headwinds, including the impact of the COVID-19 pandemic, changing consumer preferences, and inflationary pressures on commodity prices, particularly for beef and beef trimmings.

Financials

In the company's most recent fiscal second quarter, ended September 29, 2024, Nathan's reported revenues of $41.1 million, a 6.0% increase compared to the same period in the prior year. This top-line growth was driven by a 5.1% increase in Branded Products sales, a 3.0% rise in Company-owned restaurant sales, and a 14.0% jump in license royalties. However, the company's gross profit margin declined to 13.0% from 15.0% in the year-ago quarter, primarily due to a 5.0% increase in the average cost per pound of hot dogs.

For the most recent fiscal year ended March 31, 2024, Nathan's reported total revenue of $138.61 million, with a net income of $19.62 million. The company generated operating cash flow of $20.00 million and free cash flow of $19.69 million during this period.

Looking at the company's performance by geographic markets, Nathan's primarily operates in the United States. For the 26 weeks ended September 29, 2024, $83.76 million (97.5%) of its $85.88 million total revenue came from the US market, while the remaining $2.12 million (2.5%) was generated from international markets.

Liquidity

As of September 29, 2024, Nathan's had a strong liquidity position with $31.21 million in cash and cash equivalents. The company's current ratio stood at 3.03, and its quick ratio was 2.97, indicating a healthy ability to meet short-term obligations. Nathan's has a $10 million revolving credit facility under its new Credit Agreement, in addition to a $60 million term loan. The company's debt-to-equity ratio was -2.80 as of March 31, 2024, reflecting a negative shareholders' equity position.

Strategic Initiatives

To offset the impact of rising commodity prices, Nathan's has implemented various mitigation strategies, including adjusting product mix, negotiating with suppliers, and selectively passing on higher costs to customers. The company's management team has also been proactive in exploring opportunities to expand the Nathan's brand through new licensing agreements and strategic partnerships.

Outlook and Risks

Looking ahead, Nathan's faces a range of both opportunities and challenges. The company's diversified business model and strong brand recognition provide a solid foundation for continued growth, but it must navigate the ever-changing consumer landscape and persistent inflationary pressures. Additionally, the company's reliance on its licensing agreement with Smithfield Foods, Inc. for a significant portion of its revenue and profitability presents a potential risk that management must carefully manage.

Segment Performance

Branded Product Program: This segment generated $24.54 million in revenue during the 13-week period ended September 29, 2024, up 5% compared to the same period in the prior year. The volume of hot dogs sold increased by approximately 4%, while average selling prices rose by 1.4%. However, the cost of sales increased by 9% to $23.32 million, primarily due to higher commodity prices for beef and beef trimmings. As a result, the gross profit margin for this segment declined to 13% from 15% in the prior year period.

Product Licensing: The Product Licensing segment generated $9.49 million in revenue during the 13-week period, an increase of 14% compared to the prior year. This growth was primarily driven by a 14% rise in royalties earned on sales of hot dogs from Nathan's licensing agreement with Smithfield Foods, which grew to $8.60 million. The Product Licensing segment maintains a high gross margin of 99%, making it a significant contributor to Nathan's overall profitability.

Restaurant Operations: This segment, which includes both company-owned and franchised restaurants, generated $6.52 million in revenue during the 13-week period, up 1% compared to the prior year. Company-owned restaurant sales increased by 3% to $5.35 million, while franchise royalties and fees decreased by 9% to $1.17 million. The Restaurant Operations segment generally contributes lower margins compared to Nathan's other business lines.

Conclusion

Despite these headwinds, Nathan's appears well-positioned to leverage its iconic brand and innovative spirit to navigate the evolving food and restaurant industry. The company's focus on expanding its Branded Products and Licensing segments, while opportunistically investing in strategic company-owned locations, suggests a thoughtful and adaptable approach to driving long-term shareholder value. With a strong liquidity position and a diversified business model, Nathan's Famous continues to pursue growth opportunities while managing the challenges posed by inflationary pressures and changing consumer preferences.