Value Investing

Undervalued and Undiscovered Flanigan’s Enterprises Inc. Well Positioned For Growth

One of the cheapest stocks in our Acquirer’s Multiple, Small & Micro CapStock Screener is Flanigan’s Enterprises, Inc. (NYSEMKT:BDL). With a market cap around $46 million, few investors have ever heard of this great nano-cap.

Flanigan’s Enterprises, Inc. (Flanigan’s) operates a chain of full-service restaurants and package liquor stores in South Florida. The company operates package liquor stores under the Big Daddy’s Liquors name, which offer private label liquors, beer, and wines; and restaurants under the Flanigan’s Seafood Bar and Grill service mark that provide alcoholic beverages and full food service. The company operates 26 units consisting of restaurants, package liquor stores, and combination restaurants/package liquor stores; owns 1 adult entertainment club; and franchises 5 units comprising 2 restaurants and 3 combination restaurants/package liquor stores. The company was founded in 1959 and is headquartered in Fort Lauderdale, Florida.

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Flanigan’s flies under the radar of most institutions simply because of its size and its thinly traded shares. In fact, there are no analysts currently covering the company.

A quick look at the company’s share price over the past twelve months shows the stock has risen 34% to $25, just 7% off its 52 week high.

(Source: Google Finance)

Latest Results

Flanigan’s recently released its FY 2016 and Q4 2016 results. The company reported total revenue for the thirteen weeks ended December 31, 2016 increased $1.3 million or 5.21% to $26.6 million from $25.3 million for the thirteen weeks ended January 2, 2016 due primarily to increased menu prices and increased restaurant traffic. In February 2016 Flanigan’s increased certain menu prices for its bar offerings to target an increase to its total bar revenues of approximately 3.0% annually. At the same time the company increased certain menu prices for its food offerings to target an increase to its total food revenues of approximately 3.7% annually.

Growing Revenues

A quick look at the company’s revenue track record over the past few years shows that Flanigan’s has a five year annual growth rate of 7.8%. While this is great, at the same time the company has grown its book value per share by 11.5% and its operating income by 20%.

To understand how this small company achieves these growth rates its important to understand the licensing agreements within the business. At first glance, Flanigan’s appears to be just another restaurant franchise, but a closer look at the company’s SEC filings show that it’s anything but.

A quick look at the company’s latest 10-Q below shows that Flanigan’s owns 15 units, but it’s the company’s Limited Partnership operated businesses that demonstrate the real strength of its business model.

(Source, Company reports)

Flanigan’s currently has eight units that are operated under Limited Partnership Agreements (L/P Agreements).

Limited Partnership Financial Arrangement

Here’s how the company explains the limited partnership agreements in its latest 10-Q:

We manage and control the operations of all restaurants owned by limited partnerships, except the Fort Lauderdale, Florida restaurant which is owned by a related franchisee.

In general, until the investors’ cash investment in a limited partnership (including any cash invested by us and our affiliates) is returned in full, the limited partnership distributes to the investors annually out of available cash from the operation of the restaurant up to 25% of the cash invested in the limited partnership, with no management fee paid to us.

Any available cash in excess of the 25% of the cash invested in the limited partnership distributed to the investors annually, is paid one-half (½) to us as a management fee, with the balance distributed to the investors.

Once the investors in the limited partnership have received, in full, amounts equal to their cash invested, an annual management fee is payable to us equal to one-half (½) of cash available to the limited partnership, with the other one half (½) of available cash distributed to the investors (including us and our affiliates).

As of December 31, 2016, limited partnerships owning five (5) restaurants, (Surfside Florida, Kendall Florida, West Miami Florida, Pinecrest Florida and Wellington Florida), have returned all cash invested and we receive an annual management fee equal to one-half (½) of the cash available for distribution by the limited partnership. In addition to receipt of distributable amounts from the limited partnerships, we receive a fee equal to 3% of gross sales for use of the service mark “Flanigan’s Seafood Bar and Grill”.

So basically, Flanigan’s receives 50% of all of the distributable annual cashflows from its L/P operated restaurants where investors have received all of the cash they originally invested plus, a fee equal to 3% of gross sales for use of the service mark “Flanigan’s Seafood Bar and Grill”.

To understand the positive impact of the L/P agreements on Flanigan’s revenues, the company reported the following:

Restaurant Food Sales

Comparable weekly restaurant food sales for Company owned restaurants only was $651,000 and $620,000 for the first quarter of our fiscal year 2017 and the first quarter of our fiscal year 2016, respectively, an increase of 5.00%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only was $597,000 and $563,000 for the first quarter of our fiscal year 2017 and the first quarter of our fiscal year 2016, respectively, an increase of 6.04%.

Restaurant Bar Sales

Comparable weekly restaurant bar sales for Company owned restaurants only was $184,000 and $177,000 for the first quarter of our fiscal year 2017 and the first quarter of our fiscal year 2016, respectively, an increase of 3.95%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $205,000 and $200,000 for the first quarter of our fiscal year 2017 and the first quarter of our fiscal year 2016, respectively, an increase of 2.50%.

What this highlights is just how much revenue Flanigan’s is able to generate from its L/P run operations as opposed to a typical franchise royalty fee.

Consider the following from franchise.org:

“Most franchises charge franchisees a royalty based on a percentage of gross sales.  The average is 6.7 percent, however, the percentage varies by type of industry, from 4.6 percent for restaurant and hotel franchises to 12.5 percent for personnel services franchises.  Some franchise systems use a percentage range that can allow for unique business units and others use a more complex formula, such as a sliding percentage scale that adjusts downward as unit revenues rise or is set lower for new units.”

To summarize, Flanigan’s receives 50% of all of the distributable annual cashflows from its L/P operated restaurants where investors have received all of the cash they originally invested plus, a fee equal to 3% of gross sales as compared to a typical franchise royalty based model that returns 4.6% for restaurants. That’s a great business model.

Company Owned Property

In addition to its very smart L/P agreements the company has also shown it’s very prudent when it comes to managing the real estate component of its business. While Flanigan’s operations are conducted primarily on leased property the company also owns approximately 70,000 square foot of real estate and several parcels of real property including:

(i) a 10,000 square foot stand-alone building located in Fort Lauderdale, Florida that was purchased in December, 1999

ii) a 4,600 square foot stand-alone building located in Hallandale, Florida that was