| NATHANS FAMOUS INC Item 1A Risk Factors |
| The following list of risk factors is not exhaustive |
| There can be no assurance that Nathan’s has correctly identified and appropriately assessed all factors affecting its business operations or that the publicly available and other information with respect to these matters is complete and correct |
| Additional risks and uncertainties not presently known to Nathan’s or that it currently believes to be immaterial also may adversely impact the business |
| Should any risks or uncertainties develop into actual events, these developments could have material adverse effects on Nathan’s business, financial condition and results of operations |
| The quick service restaurant segment is highly competitive, and that competition could lower revenues, margins and market share |
| The quick-service restaurant segment of the foodservice industry is intensely competitive regarding price, service, location, personnel and type and quality of food |
| Nathan’s and its franchisees compete with international, national, regional and local retailers primarily through the quality, variety and value perception of food products offered |
| Other key competitive factors include the number and location of restaurants, quality and speed of service, attractiveness of facilities, effectiveness of advertising and marketing programs, and new product development |
| Nathan’s anticipates competition will continue to focus on pricing |
| Many of Nathan’s competitors have substantially larger marketing budgets, which may provide them with a competitive advantage |
| In addition, Nathan’s system competes within the food service market and the quick service restaurant segment not only for customers but also for management and hourly employees and qualified franchisees |
| If Nathan’s is unable to maintain its competitive position, it could experience downward pressure on prices, lower demand for products, reduced margins, the inability to take advantage of new business opportunities and the loss of market share |
| Changes in economic, market and other conditions could adversely affect Nathan’s and its franchisees, and thereby Nathan’s operating results |
| The quick service restaurant industry is affected by changes in international, national, regional, and local economic conditions, consumer preferences and spending patterns, demographic trends, consumer perceptions of food safety, weather, traffic patterns, the type, number and location of competing restaurants, and the effects of war or terrorist activities and any governmental responses thereto |
| Factors such as inflation, higher costs for each of food, labor, benefits and utilities, legal claims, and the availability of management and hourly employees also affect restaurant operations and administrative expenses |
| The ability of Nathan’s and its franchisees to finance new restaurant development, improvements and additions to existing restaurants, and the acquisition of restaurants from, and sale of restaurants to franchisees is affected by economic conditions, including interest rates and other government policies impacting land and construction costs and the cost and availability of borrowed funds |
| Events reported in the media, such as incidents involving food-borne illnesses or food tampering, whether or not accurate, can cause damage to each of Nathan’s brand’s reputation and affect sales and profitability |
| Reports, whether true or not, of food-borne illnesses (such as e-coli, avian flu, bovine spongiform encephalopathy, hepatitis A, trichinosis or salmonella) and injuries caused by food tampering have in the past severely injured the reputations of participants in the quick service restaurant segment and could in the future affect Nathan’s as well |
| Each of Nathan’s brand’s reputation is an important asset to the business; as a result, anything that damages a brand’s reputation could immediately and severely hurt systemwide sales and, accordingly, revenues and profits |
| If customers become ill from food-borne illnesses, Nathan’s could also be forced to temporarily close some restaurants |
| In addition, instances of food-borne illnesses or food tampering, even those occurring solely at the restaurants of competitors, could, by resulting in negative publicity about the restaurant industry, adversely affect system sales on a local, regional or systemwide basis |
| A decrease in customer traffic as a result of these health concerns or negative publicity, or as a result of a temporary closure of any of Nathan’s restaurants, could materially harm Nathan’s business, results of operations and financial condition |
| 20 _________________________________________________________________ Current restaurant locations may become unattractive, and attractive new locations may not be available for a reasonable price, if at all, which may reduce Nathan’s revenue |
| The success of any restaurant depends in substantial part on its location |
| There can be no assurance that current locations will continue to be attractive as demographic patterns change |
| Neighborhood or economic conditions where restaurants are located could decline in the future, thus resulting in potentially reduced sales in those locations |
| If Nathan’s and its franchisees cannot obtain desirable additional and alternative locations at reasonable prices, Nathan’s results of operations would be adversely affected |
| Changing health or dietary preferences may cause consumers to avoid products offered by Nathan’s in favor of alternative foods |
| The foodservice industry is affected by consumer preferences and perceptions |
| If prevailing health or dietary preferences and perceptions cause consumers to avoid the products offered by Nathan’s restaurants in favor of alternative or healthier foods, demand for Nathan’s products may be reduced and its business could be harmed |
| Nathan’s is subject to health, employment, environmental and other government regulations, and failure to comply with existing or future government regulations could expose Nathan’s to litigation, damage Nathan’s or a brand’s reputation and lower profits |
| Nathan’s and its franchisees are subject to various federal, state and local laws affecting their businesses |
| The successful development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use (including the placement of drive-thru windows), environmental (including litter), traffic and other regulations |
| Restaurant operations are also subject to licensing and regulation by state and local departments relating to health, food preparation, sanitation and safety standards, federal and state labor laws (including applicable minimum wage requirements, overtime, working and safety conditions and citizenship requirements), federal and state laws prohibiting discrimination and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act of 1990 |
| If Nathan’s fails to comply with any of these laws, it may be subject to governmental action or litigation, and its reputation could be accordingly harmed |
| Injury to Nathan’s or a brand’s reputation would, in turn, likely reduce revenue and profits |
| In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising practices in the food industry, particularly among quick service restaurants |
| As a result, Nathan’s may become subject to regulatory initiatives in the area of nutrition disclosure or advertising, such as requirements to provide information about the nutritional content of its food products, which could increase expenses |
| The operation of Nathan’s franchise system is also subject to franchise laws and regulations enacted by a number of states and rules promulgated by the US Federal Trade Commission |
| Any future legislation regulating franchise relationships may negatively affect Nathan’s operations, particularly its relationship with its franchisees |
| Failure to comply with new or existing franchise laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales |
| Changes in applicable accounting rules imposed by governmental regulators or private governing bodies could also affect Nathan’s reported results of operations, which could cause its stock price to fluctuate or decline |
| Nathan’s may not be able to adequately protect its intellectual property, which could decrease the value of Nathan’s or its brands and products |
| The success of Nathan’s business depends on the continued ability to use existing trademarks, service marks and other components of each of Nathan’s brands in order to increase brand awareness and further develop branded products |
| Nathan’s may not be able to adequately protect its trademarks, and the use of these trademarks may result in liability for trademark infringement, trademark dilution or unfair competition |
| All of the steps Nathan’s has taken to protect its intellectual property may not be adequate |
| 21 _________________________________________________________________ Nathan’s earnings and business growth strategy depends in large part on the success of its franchisees, and Nathan’s or a brand’s reputation may be harmed by actions taken by franchisees that are outside of Nathan’s control |
| A portion of Nathan’s earnings comes from royalties, rents and other amounts paid by Nathan’s franchisees |
| Franchisees are independent contractors, and their employees are not employees of Nathan’s |
| Nathan’s provides training and support to, and monitors the operations of, its franchisees, but the quality of their restaurant operations may be diminished by any number of factors beyond Nathan’s control |
| Consequently, franchisees may not successfully operate stores in a manner consistent with Nathan’s high standards and requirements and franchisees may not hire and train qualified managers and other restaurant personnel |
| Any operational shortcoming of a franchise restaurant is likely to be attributed by consumers to an entire brand or Nathan’s system, thus damaging Nathan’s or a brand’s reputation and potentially adversely affecting Nathan’s business, results of operations and financial condition |
| Leasing of significant amounts of real estate exposes Nathan’s to possible liabilities and losses |
| Nathan’s leases the land and/or the building, for certain system restaurants |
| Accordingly, Nathan’s is subject to all of the risks associated with owning and leasing real estate |
| Nathan’s generally cannot cancel these leases |
| If an existing or future store is not profitable, and Nathan’s decides to close it, Nathan’s may nonetheless be committed to perform its obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term |
| In addition, as each of the leases expires, Nathan’s may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause Nathan’s to close stores in desirable locations |
| Nathan’s may evaluate acquisitions, joint ventures and other strategic initiatives, any of which could distract management or otherwise have a negative effect on revenues, costs and stock price |
| Nathan’s future success may depend on opportunities to buy or obtain rights to other businesses that could complement, enhance or expand its current business or products or that might otherwise offer growth opportunities |
| In particular, Nathan’s may evaluate potential mergers, acquisitions, joint venture investments, strategic initiatives, alliances, vertical integration opportunities and divestitures |
| Any attempt by Nathan’s to engage in these transactions may expose it to various inherent risks, including: · accurately assessing the value, future growth potential, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates; · the potential loss of key personnel of an acquired business; · the ability to achieve projected economic and operating synergies; · difficulties in successfully integrating, operating, maintaining and managing newly acquired operations or employees; · difficulties maintaining uniform standards, controls, procedures and policies; · unanticipated changes in business and economic conditions affecting an acquired business; · the possibility of impairment charges if an acquired business performs below expectations; and · the diversion of management’s attention from the existing business to integrate the operations and personnel of the acquired or combined business or implement the strategic initiative |
| Nathan’s annual and quarterly financial results may fluctuate depending on various factors, many of which are beyond its control, and, if Nathan’s fails to meet the expectations of securities analysts or investors, Nathan’s share price may decline |
| Nathan’s sales and operating results can vary from quarter to quarter and year to year depending on various factors, many of which are beyond its control |
| Certain events and factors may directly and immediately decrease demand for Nathan’s products |
| If customer demand decreases rapidly, Nathan’s results of operations would also decline |
| These events and factors include: · variations in the timing and volume of Nathan’s sales and franchisees’ sales; · sales promotions by Nathan’s and its competitors; 22 _________________________________________________________________ · changes in average same-store sales and customer visits; · variations in the price, availability and shipping costs of supplies; · seasonal effects on demand for Nathan’s products; · unexpected slowdowns in new store development efforts; · changes in competitive and economic conditions generally; · changes in the cost or availability of ingredients or labor; · weather and acts of God; and · changes in the number of franchise agreement renewals |
| Catastrophic events may disrupt Nathan’s business |
| Unforeseen events, including war, terrorism and other international conflicts, public health issues, labor unrest and natural disasters such as earthquakes, hurricanes or other adverse weather and climate conditions, whether occurring in the United States or abroad, could disrupt Nathan’s operations, disrupt the operations of franchisees, suppliers or customers, or result in political or economic instability |
| These events could reduce demand for Nathan’s products or make it difficult or impossible to receive products from suppliers |
| Nathan’s international operations are subject to various factors of uncertainty |
| Nathan’s business outside of the United States is subject to a number of additional factors, including international economic and political conditions, differing cultures and consumer preferences, currency regulations and fluctuations, diverse government regulations and tax systems, uncertain or differing interpretations of rights and obligations in connection with international franchise agreements and the collection of royalties from international franchisees, the availability and cost of land and construction costs, and the availability of appropriate franchisees |
| Although Nathan’s believes it has developed the support structure required for international growth, there is no assurance that such growth will occur or that international operations will be profitable |
| Nathan’s may from time to time sell certain of its leasehold interests to various third parties |
| The disposition of leases to new or existing franchisees or other third parties for Company-operated restaurants or franchised restaurants where Nathan’s has guaranteed the lease obligation has been part of Nathan’s strategy to develop the overall health of the system by disposing of such interests where prudent |
| The realization of gains from future dispositions of leasehold interests depends in part on the ability of Nathan’s to complete any future disposition transactions on acceptable terms |
| There are various reasons why the program might be unsuccessful, including changes in economic, credit market, real estate market or other conditions, and the ability of Nathan’s to complete sale transactions on acceptable terms and at or near the prices estimated as attainable by Nathan’s |
| Increases in the cost of food and paper products could harm our profitability and operating results |
| The cost of the food and paper products we use depends on a variety of factors, many of which are beyond our control |
| We purchase large quantities of beef and our beef costs in the United States represent approximately 85prca of our food costs |
| The market for beef is particularly volatile and is subject to significant price fluctuations due to seasonal shifts, climate conditions, industry demand and other factors |
| For example, recent increased demand in beef resulted in shortages, requiring us to pay significantly higher prices for the beef we purchased |
| We were unable to pass all of the recent price increases to our customers |
| If the price of beef or other food products that we use in our restaurants increase in the future and we choose not to pass, or cannot pass, these increases on to our customers, our operating margins would decrease |
| Food and paper products typically represent approximately 25prca to 30prca of our cost of sales |
| Fluctuations in weather, supply and demand and economic conditions could adversely affect the cost, availability and quality of some of our critical products, including beef |
| Our inability to obtain requisite quantities of high-quality ingredients would adversely affect our ability to provide the menu items that are central to our business, and the highly competitive nature of our industry may limit our ability to pass through increased costs to our customers |
| Continuing increases in the cost of fuel would increase the distribution costs of our prime products thereby increasing the food and paper cost to us and to our franchisees, thus negatively affecting profitability |
| 23 _________________________________________________________________ Labor shortages or increases in labor costs could slow our growth or harm our business |
| Our success depends in part upon our ability to continue to attract, motivate and retain regional operational and restaurant general managers with the qualifications to succeed in our industry and the motivation to apply our core service philosophy |
| If we are unable to continue to recruit and retain sufficiently qualified managers or to motivate our employees to achieve sustained high service levels, our business and our growth could be adversely affected |
| Competition for these employees could require us to pay higher wages that could result in higher labor costs |
| In addition, increases in the minimum wage or labor regulation could increase our labor costs |
| We may be unable to increase our prices in order to pass these increased labor costs on to our customers, in which case our margins and our franchisees’ margins would be negatively affected |
| We face risks of litigation and pressure tactics, such as strikes, boycotts and negative publicity from customers, franchisees, suppliers, employees and others, which could divert our financial and management resources and which may negatively impact our financial condition and results of operations |
| Class action lawsuits have been filed, and may continue to be filed, against various quick service restaurants alleging, among other things, that quick service restaurants have failed to disclose the health risks associated with high-fat foods and that quick service restaurant marketing practices have targeted children and encouraged obesity |
| In addition, we face the risk of lawsuits and negative publicity resulting from injuries, including injuries to infants and children, allegedly caused by our products, toys and other promotional items available in our restaurants or our playground equipment |
| In addition to decreasing our sales and profitability and diverting our management resources, adverse publicity or a substantial judgment against us could negatively impact our business, results of operations, financial condition and brand reputation, hindering our ability to attract and retain franchisees and grow our business in the United States and internationally |
| In addition, activist groups, including animal rights activists and groups acting on behalf of franchisees, the workers who work for our suppliers and others, have in the past, and may in the future, use pressure tactics to generate adverse publicity about us by alleging, for example, inhumane treatment of animals by our suppliers, poor working conditions or unfair purchasing policies |
| These groups may be able to coordinate their actions with other groups, threaten strikes or boycotts or enlist the support of well-known persons or organizations in order to increase the pressure on us to achieve their stated aims |
| In the future, these actions or the threat of these actions may force us to change our business practices or pricing policies, which may have a material adverse effect on our business, results of operations and financial condition |
| Further, we may be subject to employee, franchisee and other claims in the future based on, among other things, mismanagement of the system, unfair or unequal treatment, discrimination, harassment, wrongful termination and wage, rest break and meal break issues, including those relating to overtime compensation |
| We have been subject to these types of claims in the past, and if one or more of these claims were to be successful or if there is a significant increase in the number of these claims, our business, results of operations and financial condition could be harmed |