Ark Restaurants Corp. — Q1 FY2023 Form 10-Q
Reporting period: 13 weeks ended December 31, 2022, compared with the 13 weeks ended January 1, 2022. Amounts below are in millions unless otherwise indicated. The company operated 17 restaurants and bars, 16 fast-food concepts, and catering operations in the United States.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $47.445 | $43.986 | +7.9% |
| Operating income | $2.203 | $2.791 | -21.1% |
| Operating margin | 4.6% | 6.3% | -1.7 percentage points |
| Net income attributable to Ark | $1.725 | $2.209 | -21.9% |
| Diluted EPS | $0.47 | $0.61 | -$0.14 |
| Cash from operating activities | $(0.903) | $3.852 | Decreased $4.755 |
Food and beverage same-store sales rose 6.4%. Food and beverage sales increased 7.6%, while other revenue rose 21.0%. Food costs were 26.2% of revenue versus 28.5%; payroll was 34.8% versus 32.4%, occupancy 13.0% versus 11.9%, and other operating costs 12.5% versus 11.7%. Higher labor, occupancy, and operating costs more than offset revenue growth and lower food-cost ratio.
At December 31, 2022, cash and cash equivalents were $19.427 million and a certificate of deposit was $5.044 million, which matured in January 2023. Working capital was $4.850 million, compared with $4.210 million at October 1, 2022. Notes payable totaled $21.675 million, including $5.643 million current and $15.979 million long-term net of deferred financing costs; no PPP loans remained outstanding. Operating lease liabilities totaled $103.285 million. Cash declined by $4.012 million during the quarter. Investing cash use was $0.751 million, primarily for fixed-asset purchases; financing cash use was $2.358 million, including debt principal, dividends, and non-controlling-interest distributions.
Material changes and notable items
- Company-wide same-store sales increased 6.4%, led by New York (+26.0%), Washington, D.C. (+21.0%), and Las Vegas (+9.2%). Florida declined 9.2% and Atlantic City declined 10.4%.
- Management attributed weaker operating income to labor inflation and staffing challenges, higher commodity and other costs, and higher percentage rents on increased sales. Targeted menu-price increases and stronger event business supported sales and food-cost performance.
- Operating cash flow turned negative from $3.852 million provided in the prior-year quarter, primarily due to lower accrued expenses—including catering deposits—bonus payments, and working-capital movements.
- The quarter included $0.272 million of income from PPP-loan forgiveness. The company has repaid a $0.280 million loan while appealing a forgiveness denial.
- The company paid a $0.125-per-share quarterly dividend during the quarter. A further $0.125-per-share dividend was declared for payment on March 14, 2023.
Outlook, risks, and commitments
No numerical revenue or earnings guidance was provided. Management said existing cash, operating cash-generation capability, banking facilities, and potential access to additional financing were expected to be sufficient for capital expenditures, debt maturities, and operations for at least the next 12 months. Dividend decisions remain at the board’s discretion.
Key risks include inflation in food, wages, benefits, insurance, and other costs; staffing and supply-chain challenges; changes in consumer spending and preferences; COVID-19-related disruption; weather and geographic concentration; lease renewal and restaurant performance; and compliance with debt covenants. The company noted that further cost increases may not be fully offset by menu pricing. Its bank debt bears interest at LIBOR plus 3.5%; management was working with its lender on a replacement reference rate and did not expect the transition to materially affect its financial position or interest expense.
Lease commitments for Las Vegas restaurant refreshes include minimum spending of $1.5 million for Gallagher’s (about $0.5 million spent to date), $4.0 million for America, and $3.5 million for Village Eateries and related locations. Deadlines extend from April 2023 to December 2024, subject to contractual extensions. The approximately $0.6 million settlement of a tipped-worker class action received final approval in October 2022 and was paid in the quarter; it had been accrued previously. Management reported ordinary-course legal claims and did not expect them to have a material adverse effect. No impairment charges were recorded in the quarter, although management is monitoring certain restaurants for recoverability.
Important facts for investors to verify
- Whether sales growth and same-store trends persist, especially in Florida, and whether pricing can offset continued cost inflation without weakening customer demand.
- The sustainability of margins given payroll and occupancy expense growth, and the causes and timing of working-capital cash outflows.
- Debt-covenant compliance, upcoming principal and balloon payments, and the outcome of the LIBOR replacement process.
- Progress and total cost of the committed Las Vegas refresh projects, alongside lease obligations and other capital needs.
- The appeal outcome for the repaid $0.280 million PPP loan and the board’s future dividend decisions.