Flanigan’s Enterprises Stock: Upside Still Exists For Long-Term Investors

The major indices are down about 10% year-to-date and many growth stocks have continued the downtrend that began in 2021. Actually, 2022 has been another year with investors dumping unprofitable speculative growth stocks and returning to the value names. In other words, they have been separating the wheat from the chaff.

One of these beneficiaries among the value names is Flanigan’s Enterprises, Inc. (NYSE:BDL). Operationally speaking, BDL has handled the pandemic very well and investors have been handsomely rewarded over the last twelve months. Does further upside still exist?

Flanigan’s Enterprises – Brief Overview

BDL is the owner and operator of restaurants and retail liquor stores in the U.S. With the exception of “The Whale’s Rib”, a restaurant BDL operates but does not own, all of the restaurants operate under its service marks “Flanigan’s Seafood Bar and Grill” or “Flanigan’s”, while all of the package liquor stores operate under its service marks “Big Daddy’s Liquors” or “Big Daddy’s Wine & Liquors.”, as illustrated below:

Types of Units	January 1,2022	October 2,2021	January 2,2021
Company Owned: Combination package and restaurant	3	3	3
Restaurant only	7	7	7
Package store only	7	7	7
Company Operated Restaurants Only:
Limited Partnerships	8	8	8
Franchise	1	1	1
Unrelated Third Party	1	1	1
Total Company Owned/Operated Units	27	27	27
Franchised Units	5	5	5

Flanigan’s Enterprises Balance Sheet

BDL operates in two reportable segments – package stores and restaurants. Back in 2020, COVID-19 along with “shelter-in-place” orders and other governmental mandates caused significant disruptions to its business by adversely affected its restaurant operations. As a result of the uncertainty associated with the duration of the closures of its restaurants, BDL cancelled a previously declared cash dividend of $0.30 per share in Q2 FY 2020.

In FY 2021, in accordance with guidance from health officials, BDL did offer both indoor and outdoor food and bar options at all of its restaurants, with, among other precautions appropriate social distancing and mask requirements for all customers and employees. BDL’s liquor stores also saw increased demand during the pandemic, so the company ended up recording top line YoY growth with food sales representing approximately 63% and liquor sales (restaurants & stand-alone stores) representing approximately 37% of the total revenue, as illustrated below:

		52 Weeks Ended								53 Weeks Ended
		October 2, 2021								October 3, 2020
		Amount (In thousands)				Percent				Amount (In thousands)				Percent
Restaurant food sales		$	84,466				62.75%			$	68,685				61.9%
Restaurant bar sales			20,832				15.48%				15,967				14.4%
Package store sales			29,304				21.77%				26,276				23.7%
Total Sales		$	134,602				100.00%			$	110,928				100.00%
Franchise related revenues			1,673								1,260
Rental income			770								680
Other operating income (Loss)			262								109
Total Revenue		$	137,307							$	112,977

The good news don’t end here. BDL announced strong bottom line YoY growth for FY 2021 with net income attributable to stockholders being $11.8 million from $1.1 million for FY 2020 due largely to the forgiveness of debt of the PPP Loans. Nevertheless, BDL did not declare a cash dividend in FY 2021, because of continued uncertainty surrounding the duration of restrictions mandated by state and local governments in response to COVID-19.

The strong top line and bottom line YoY growth continued in Q1 FY 2022, as illustrated below (in thousands):

		Thirteen Weeks Ended
		January 1, 2022				January 2, 2021
REVENUES:
Restaurant food sales		$	22,205			$	18,328
Restaurant bar sales			6,007				4,443
Package store sales			8,511				8,011
Franchise related revenues			446				386
Rental income			199				187
Other operating income			35				25
			37,403				31,380
COSTS AND EXPENSES:
Cost of merchandise sold:
Restaurant and lounges			10,333				7,522
Package goods			6,340				5,851
Payroll and related costs			12,236				9,463
Occupancy costs			1,698				1,806
Selling, general and administrative expenses			6,031				5,468
			36,638				30,110
Income from Operations			765				1,270
OTHER INCOME (EXPENSE):
Interest expense			(193	)			(279	)
Interest and other income			14				12
Gain on forgiveness of PPP loans			3,488				–
Gain on sale of property and equipment			11				25
			3,320				(242	)
Income before Provision for Income Taxes			4,085				1,028
Benefit (Provision) for Income Taxes			(147	)			4
Net Income			3,938				1,032
Less: Net income attributable to noncontrolling interests			(2,374	)			(252	)
Net income attributable to Flanigan’s Enterprises, Inc. stockholders		$	1,564			$	780

On top of this, COVID-19 did not prevent BDL from generating positive operating cash flow and positive free cash flow both in FY 2021 and Q1 FY 2022, as illustrated below:

		Fiscal Years
		2021				2020
		(in thousands)
Net cash and cash equivalents provided by operating activities		$	14,361			$	8,785
Net cash used in investing activities			(11,901	)			(3,271	)
Net cash provided by financing activities			294				10,736

and:

		Thirteen Weeks Ended
		January 1, 2022				January 2, 2021
		(in thousands)
Net cash provided by operating activities		$	4,531			$	3,770
Net cash used in investing activities			(1,979	)			(1,568	)
Net cash used in financing activities			(1,626	)			(1,096	)

This consistency in generating positive operating cash flow and positive free cash flow allowed BDL to reinstate its dividend policy and announce a dividend of $1 per share a few weeks ago. Actually, this dividend is not only the result of the fact that BDL’s operations have largely returned to normalcy. This dividend is also an indicator that the worst is behind us and the company is optimistic about its cash flows in the next quarters.

Growth

BDL has taken these growth initiatives over the last quarters:

1) Purchase of Real Property: BDL recently acquired the following two properties where it will open new stores, as quoted below (emphasis added):

North Lauderdale, Florida (“Flanigan’s Seafood Bar and Grill”/”Big Daddy’s Liquors”): On October 7, 2014, we entered into an Amendment to Lease Agreement with a non-affiliated third party from whom we rented approximately 4,600 square feet of commercial space located at 5450 N. State Road 7, North Lauderdale, Florida where we operate a combination “Flanigan’s Seafood Bar and Grill” restaurant and “Big Daddy’s Liquors” package liquor store (Store #40). The Lease Amendment extended the term of the Lease Agreement until December 31, 2020 and granted us the option to purchase the real property and improvements through December 31, 2020 for $1,200,000. During the fourth quarter of our fiscal year 2020 we exercised the Option to Purchase and closed on the acquisition of the property on December 31, 2020. We paid all cash at closing.

Sunrise, Florida (“Flanigan’s Seafood Bar and Grill”): During the second quarter of our fiscal year 2019, we entered into a Lease Agreement with a non-affiliated third party to rent approximately 6,900 square feet of commercial space located at 14301 W. Sunrise Boulevard, Sunrise, Florida where, subject to certain conditions, we anticipate opening a new restaurant location. The Sunrise Lease Agreement granted us an option to purchase, the real property and improvements by March 2, 2021 for $4,800,000. During the third quarter of our fiscal year 2019, we assigned the Sunrise Lease Agreement, excluding the Option to Purchase, to a newly formed limited partnership. During the first quarter of our fiscal year 2021, we exercised the Option to Purchase and during the second quarter of our fiscal year 2021 we closed on the acquisition of the real property located at 14301 W. Sunrise Boulevard, Sunrise, Florida. We financed this acquisition with a loan from an unrelated third party lender in the principal amount of $2.2 million and paid cash for the balance. The mortgage loan accrues interest at the fixed annual rate of 3.65%, is amortized over fifteen (15) years, and requires us to pay monthly payments of principal and interest in the amount of $15,900 with the entire principal balance and all accrued but unpaid interest due in March, 2036.

2) Execution of Leases for New Locations: BDL recently leased the following two properties where it will open new stores, as quoted below (emphasis added):

Miramar, Florida (“Flanigan’s”): During the fourth quarter of our fiscal year 2019, we entered into a Lease Agreement with a non-affiliated third party, (the “Landlord”), to rent approximately 6,000 square feet of commercial space for a restaurant location in a shopping center at 11225 Miramar Parkway, #250, Miramar, Florida 33024 (Store #25), which shopping center was under construction and where we anticipate opening a new restaurant location. We assigned this Lease Agreement to a newly formed limited partnership in which we currently are (i) the sole general partner; and (ii) our wholly owned subsidiary is the sole limited partner. While there can be no assurances that we will be successful in doing so, we are currently selling limited partnership interests to third parties, as well as affiliates of the Company, in order to raise net proceeds in an amount of $4,000,000, which proceeds will be used to build out this potential restaurant location. The new restaurant location’s ownership and operating structure will be substantially similar to that of our other restaurants owned by limited partnerships. Any amounts we advance to the limited partnership will be applied as a credit to limited partnership equity in the limited partnership we may acquire (which equity shall be purchased at the same price and upon the same terms as other equity investors). Any excess amounts advanced by us will be reimbursed to us by the limited partnership without interest. Subsequent to the end of the third quarter of our fiscal year 2021, we received notification from the Landlord that it had completed substantially all of the Landlord’s work under the Lease Agreement and was delivering possession of the leased premises to us.

Miramar, Florida (“Big Daddy’s Wine & Liquors”): During the fourth quarter of our fiscal year 2019, we entered into a Lease Agreement with a non-affiliated third party, (the “Landlord”), to rent approximately 2,000 square feet of commercial space for a restaurant location in a shopping center at 11225 Miramar Parkway, #245, Miramar, Florida 33024 (Store #24), which shopping center was under construction and where we anticipate opening a new retail package liquor store. The new package liquor store location will be Company-owned. Subsequent to the end of the third quarter of our fiscal year 2021, we received notification from the Landlord that it had completed substantially all of the Landlord’s work under the Lease Agreement and was delivering possession of the leased premises to us.

3) Purchase of 4 COP Liquor License: In Q3 FY 2021, BDL purchased a 4 COP liquor license and plans to use it in the foreseeable future, as quoted below:

During the third quarter of our fiscal 2021, we purchased a 4 COP quota liquor license, which permits the sale of beer, wine and liquor for on and/or off premise consumption, for Broward County, Florida from an unrelated third party for $192,200. The liquor license is currently inactive, but we intend to use it in connection with the operation of a package liquor store we are developing in Miramar, Florida.

4) Menu Price Increases: BDL increased menu prices in Q1 FY 2022, that will be reflected on its top line in the next quarters, as quoted below:

During the first quarter of our fiscal year 2022, we increased menu prices for our food offerings (effective October 3, 2021 and December 19, 2021, respectively) to target an aggregate increase to our food revenues of approximately 8.83% annually and we increased menu prices for our bar offerings (effective December 12, 2021) to target an increase to our bar revenues of approximately 7.80% annually to offset higher food and liquor costs and higher overall expenses. Prior to these increases, we previously raised menu prices in the third quarter of our fiscal year 2021.

Additionally, we project that these tailwinds will support the company’s growth strategy:

1) BDL operates in Florida and Florida has been consistently growing its population, including the period from July 2020 to July 2021, when Florida’s population grew by 1%. As a result, it’s safe to assume that some of the new residents will visit one or more of BDL’s stores.

2) There are still some factors that prevent BDL from fully utilizing its operational capacity and maximizing its results from its existing stores. For instance, due to the pandemic, there are still people who avoid dining and favor food delivery or take-out. Furthermore, the number of tourists in Florida has not yet returned to pre-pandemic levels including tourists from the cruise industry which was devastated by the pandemic.

BDL Stock Valuation

Based on the outlook and the tailwinds above, we estimate that revenue and adjusted EBITDA in FY 2022 will be about $150 million and $13 million, respectively.

Meanwhile, with interest-bearing debt of $19.6 million and $33.6 million in cash & cash equivalents (Q1 FY 2022), BDL’s Enterprise Value currently is about $52 million.

Therefore, EV-to-2022 Revenue and EV-to-2022 adj. EBITDA are about 0.4 times and 4 times, respectively, at the current price of $35 per share.

It’s clear that BDL is not expensive despite the fact that it has risen significantly over the last twelve months. As such, we believe that it still has upside potential from today’s price levels for investors with an investment horizon of 2-5 years.

High Insider Ownership In BDL Stock

Insiders own 54.4%, so there is no question that insiders’ interests are aligned with shareholders’, as illustrated below:

Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership		Percent of Class
Current Named Executive Officers and Directors:
James G. Flanigan	969,190		52.1%
Patrick J. Flanigan	144,264		7.8%
Michael B. Flanigan	31,712		1.7%
August Bucci	3,600		*
M.E. Betsy Bennett	1,000		*
Jeffrey D. Kastner	—		—
Christopher O’Neil	—		—
John P. Foster	—		—
Christopher J. Nelms	—		—
All executive officers and directors as a group (9 persons)	1,011,072		54.4%

* Less than 1%

Risks

We believe that potential investors and existing shareholders need to take into consideration the following key risks:

1) Labor shortfalls and labor cost inflation: Similar to the broader economy in the U.S., BDL could experience labor shortfalls and/or significant labor cost inflation, which will adversely affect its operations and will weigh on its results.

2) Heavy dependence on Florida: BDL has deep Florida roots with all its restaurants and liquor stores being located in Florida. Therefore, BDL is heavily reliant on Florida, where it admittedly has a strong brand name.

However, we believe that the company has limited growth prospects in Florida, despite the fact that Florida saw second-highest population growth in the U.S. in 2021 over last year. Specifically, according to the linked article, Florida trailed only Texas in population increases from 2020 to 2021 and grew by 211,196 residents from July 1, 2020, to July 1, 2021, to a population of 21,781,128.

The key reason for the limited growth prospects is that there are many other well-established competitors both in the restaurant industry and the liquor industry, as quoted below (emphasis added):

The liquor and hospitality industries are highly competitive and are often affected by changes in taste and entertainment trends among the public, by local, national and economic conditions affecting spending habits, and by population and traffic patterns. We believe that the principal means of competition among package liquor stores is price and that, in general, the principal means of competition among restaurants include the location, type and quality of facilities and the type, quality and price of beverage and food served.

Our package liquor stores compete directly or indirectly with local retailers and discount “superstores”. Due to the competitive nature of the liquor industry in South Florida, we have had to adjust our pricing to stay competitive, including meeting all competitors’ advertisements. Such practices will continue in the package liquor business. We believe that we have a competitive position in our market because of widespread consumer recognition of the “Big Daddy’s Liquors” and “Big Daddy’s Wine & Liquors” names.

Our restaurants compete directly or indirectly with many well-established competitors, both nationally and locally owned. We believe that we have a competitive position in our market because of widespread consumer recognition of the “Flanigan’s Seafood Bar and Grill” and “Flanigan’s” names.

We have many well-established competitors, both nationally and locally owned, with substantially greater financial resources than we do. Their resources and market presence may provide advantages in marketing, purchasing and negotiating leases. We compete with other restaurant and retail establishments for sites and finding management personnel.

3) Acquisitions: Given that BDL is heavily reliant on Florida, it may grow its business by acquiring other names in other states. However, the successful deal is not a sure thing, so BDL may not be able to successfully integrate the acquired business without substantial expense and/or the acquired business could fail to generate anticipated revenue or earnings.

4) The weather risk: It’s not a secret that Florida is a hurricane-prone area, so during hurricane season, (June 1 through November 30 each year), the company’s restaurants and/or package liquor stores may face harsh weather.

Therefore, hurricanes could cause significant damages to the company’s stores and negatively impact the company’s operations for an extended period of time.

Additionally, BDL could be unable to acquire windstorm insurance coverage or adequate windstorm insurance coverage at a reasonable rate, as quoted below:

Due to the anticipated active hurricane seasons in South Florida in the future, we may not be able to acquire windstorm insurance coverage for our restaurant and package liquor store locations on a year-to-year basis or may not be able to get adequate windstorm insurance coverage at reasonable rates. If we are unable to obtain windstorm insurance coverage or adequate windstorm insurance coverage at reasonable rates, then we will be self-insured for all or a part of the exposure for damages caused by a hurricane impacting South Florida, which may have a material adverse effect upon our financial condition and/or results of operations.

Takeaway

We advised the subscribers to our research to buy BDL at $15 per share in August 2020, and BDL has risen 140% since our buy recommendation currently standing at about $35 per share.

In other words, BDL is one of those undiscovered value names that span a variety of sectors and have outperformed over the last twelve months.

Despite this outperformance, BDL is cheap with a strong balance sheet and a growth strategy in place. As such, we project that, barring unforeseen events, its stock still has upside potential based on an investment horizon of 2-5 years.