Nathan's Famous, Inc. (NATH) has long been synonymous with delicious hot dogs and a beloved American brand. Founded in 1916 on the boardwalk of Coney Island, New York, the company has evolved from a single storefront to a diversified food service and retail powerhouse, boasting a presence across multiple channels and a reputation for quality products.

Company History

The company's storied history began when Polish immigrant Nathan Handwerker opened a small hot dog stand, selling his signature frankfurters for just a nickel. Over the decades, Nathan's Famous weathered the ups and downs of the Coney Island neighborhood, expanding its footprint and establishing itself as a quintessential part of the American dining experience. By the 1970s, the company had begun franchising its restaurants, bringing the Nathan's brand to new markets and solidifying its national presence. This expansion continued, with Nathan's opening its first international restaurant and growing its footprint across the United States.

Retail Expansion

In addition to its restaurant operations, Nathan's Famous has developed a significant presence in the retail sector. Beginning in the 1970s, the company started selling packaged Nathan's Famous hot dogs and other products through retail channels like grocery stores and club stores. This move into licensing and branded products has become a major driver of the company's revenues and profitability over the years, complementing its traditional restaurant business.

Business Model

Today, Nathan's Famous operates a multi-faceted business model, comprising company-owned restaurants, a robust Branded Product Program, a thriving licensing division, and a growing franchise network. This diversification has allowed the company to navigate industry challenges and capitalize on evolving consumer trends, delivering consistent financial performance.

Financials

For the fiscal year ended March 31, 2024, Nathan's Famous reported total revenues of $138.61 million, a 6.0% increase from the prior year. Net income for the period stood at $19.62 million, with diluted earnings per share of $4.80. The company's annual operating cash flow reached $20.00 million, with free cash flow of $19.69 million.

In the most recent quarter ended December 29, 2024, Nathan's Famous reported total revenues of $31.52 million, representing a 9.0% increase compared to the same period in the prior year. Net income for the quarter was $4.48 million. The increase in revenue was primarily driven by higher sales in the Branded Product Program and higher license royalties.

Liquidity

The company's strong balance sheet is evidenced by a current ratio of 2.94 and a quick ratio of 2.90. The debt-to-equity ratio stands at -0.43, providing ample liquidity and financial flexibility to support future growth initiatives. As of the most recent reporting period, Nathan's Famous had $23.71 million in cash and cash equivalents, with an additional $10.0 million available under its revolving credit facility.

Key Business Segments

Nathan's Famous operates through three primary business segments: Branded Product Program, Product Licensing, and Restaurant Operations.

The Branded Product Program segment, which involves the sale of Nathan's hot dogs and other proprietary products to the foodservice industry, has demonstrated consistent growth. In the thirteen weeks ended December 29, 2024, this segment generated $21.10 million in revenue, representing a 7% increase compared to the same period in the prior year. However, the cost of sales for this segment increased by 10% to $18.34 million, primarily due to a 4% increase in the average cost per pound of hot dogs.

The Product Licensing segment has been a reliable source of income, generating $7.11 million in revenue during the thirteen weeks ended December 29, 2024, a 17% year-over-year increase. This growth was driven by a 16% rise in royalties earned on sales of hot dogs from the company's licensing agreement with Smithfield Foods, Inc., as well as higher royalties from the sale of other Nathan's branded products such as French fries, onion rings, and proprietary spices.

The Restaurant Operations segment, which includes company-owned restaurants and franchise fees, reported total revenue of $2.79 million for the thirteen weeks ended December 29, 2024, an increase of 9% compared to the same period in the prior year. This increase was primarily attributable to higher sales at the company's Coney Island locations due to an increase in average check.

Franchise Operations

Nathan's Famous' franchise operations, which include both traditional restaurant locations and its Branded Menu Program, have also been a area of focus. As of March 31, 2024, the company's restaurant system, excluding virtual kitchens, consisted of 240 locations across 17 states and 12 foreign countries. The Branded Menu Program, which allows foodservice operators to serve a variety of Nathan's Famous menu items, has expanded to 128 locations, underscoring the brand's appeal and the company's ability to adapt to changing consumer preferences.

Resilience and Adaptation

Despite the challenges posed by the COVID-19 pandemic, Nathan's Famous has demonstrated resilience and an ability to adapt. The company's diversified business model, with its emphasis on retail and licensing, has helped offset the temporary disruptions experienced in its restaurant operations. Looking ahead, the company remains focused on further expanding its Branded Product Program, strengthening its licensing agreements, and selectively growing its franchise network, all while maintaining a prudent approach to capital allocation and shareholder returns.

Challenges and Mitigation

In recent years, Nathan's Famous has faced scrutiny from short-sellers, who have raised concerns about the company's reliance on its licensing agreement with Smithfield Foods, Inc. and the potential impact of commodity price fluctuations on its profit margins. However, the company has worked to address these issues, renegotiating its agreement with Smithfield and implementing strategies to mitigate the impact of volatile input costs.

Nathan's has faced additional challenges, including supply constraints and inflationary pressures impacting commodity costs, particularly for beef and beef trimmings. The company has worked to manage these headwinds through pricing actions and other mitigation strategies, demonstrating its ability to adapt to changing market conditions. For instance, in the most recent quarter, the cost of sales for Company-owned restaurants was 68% of restaurant sales, down from 71% in the prior year period, due to price increases and improved food and paper costs as a percentage of sales.

Future Outlook

As Nathan's Famous continues to navigate the evolving landscape of the food industry, the company's rich history, iconic brand, and diverse business model position it well for future growth and success. The company's primary focus is to expand the market penetration of the Nathan's Famous brand by increasing the number of distribution points for its products across all of its business platforms, including its Licensing Program, Branded Products Program, and its namesake restaurant system.

While the company does not expect to significantly increase the number of company-owned restaurants, it may opportunistically and strategically invest in a small number of new units as showcase locations for prospective franchisees. Nathan's Famous remains committed to managing the impact of inflationary pressures on commodity costs, particularly for beef and beef trimmings, while continuing to drive growth across its various business segments.

With a steadfast commitment to quality, innovation, and operational excellence, Nathan's Famous remains a quintessential American success story, poised to delight consumers and deliver value to shareholders for years to come. However, investors should be aware that the company's future results could be materially impacted by its dependence on Smithfield Foods, Inc. as its principal supplier and the importance of its licensing agreement with Smithfield Foods, Inc. to its licensing revenue and overall profitability.