ARK Restaurants Corp. — Fiscal 2018 Form 10-K
Reporting period: Fiscal year ended September 29, 2018 (52 weeks), compared with the 52 weeks ended September 30, 2017. This is an annual report; it does not provide standalone fourth-quarter results. The consolidated statements were audited, and the auditor gave an unqualified opinion.
Business context
ARK owned and/or operated 20 restaurants and bars, 19 fast-food concepts and catering operations across the United States. Its portfolio includes leased and company-owned properties, with substantial outdoor dining at certain major locations. The company reports as one operating segment.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Total revenue | $159.990 million | $153.877 million | Up 4.0% |
| Food and beverage sales | $156.837 million | $151.196 million | Up 3.7% |
| Restaurant operating income | $5.032 million | $5.371 million | Down 6.3%; margin approximately 3.1% versus 3.5% |
| Operating income | $5.032 million | $7.008 million | Down 28.2%; FY2017 included a $1.637 million property-sale gain |
| Net income attributable to ARK | $4.655 million | $4.039 million | Up 15.3%; FY2018 included a $1.147 million income tax benefit |
| Diluted EPS | $1.31 | $1.14 | Up from prior year |
| Cash from operations | $9.575 million | $10.350 million | Down $0.775 million |
| Cash used in investing | $5.050 million | $14.641 million | Lower primarily due to no comparable acquisition spending |
| Cash used in financing | $0.919 million | $1.542 million | Primarily dividends, debt principal payments and non-controlling-interest distributions |
Food and beverage cost was 26.9% of revenue, payroll 34.8%, occupancy 11.6%, and depreciation and amortization 3.2%. Payroll and occupancy rose as a share of revenue, reflecting minimum-wage increases, rent increases and percentage rents. Interest expense increased to $1.163 million from $0.753 million.
At year-end, cash was $5.012 million; total assets were $84.737 million and total liabilities were $41.001 million. Debt was $21.256 million before $1.396 million of current maturities and deferred financing costs; cash less gross debt was approximately negative $16.244 million. Working capital was negative $4.628 million, improved from negative $16.072 million in 2017, largely following a June 2018 refinancing. The company reported $6.568 million outstanding under its revolving facility. Management believed cash, banking facilities and operating cash flow would meet liquidity and capital-spending needs through at least December 31, 2019. The filing reports compliance with debt covenants at year-end.
Operating leases require future minimum payments of $72.396 million, including $9.529 million in fiscal 2019. The company paid $1.00 per share in dividends during FY2018 and stated its intention to continue quarterly dividends of $0.25 per share, subject to board discretion and financial conditions.
Material changes and management commentary
- Revenue growth reflected the reopening of Sequoia after renovation, the Alabama Oyster House properties acquired in November 2016, and other sales changes; it was partly offset by the closure of the Jupiter, Florida property.
- Management attributed lower restaurant operating income mainly to poor Northeast weather in FY2018’s fourth quarter. Improvements at Sequoia and the Dania Beach Rustic Inn partly offset the pressure.
- Company-wide same-store sales are described in the narrative as down 1.7%, while the accompanying table shows same-store food and beverage sales rising from $140.510 million to $142.957 million, or up 1.7%. Regional results varied: Las Vegas and Florida increased, while Washington, D.C. and Boston declined materially.
- The June 1, 2018 refinancing extended the revolving facility to May 31, 2021, set availability at the lesser of $10 million or a borrowing-base-style formula stated in the agreement, and amended term-note payment schedules. The facility and notes bear interest at LIBOR plus stated margins; the revolving balance’s weighted-average rate was 5.4% at year-end.
- The Tax Cuts and Jobs Act produced a $1.382 million benefit from remeasuring deferred tax balances. The FY2018 income tax benefit also reflects other tax items; it materially supported reported net income.
- The company has a $7.036 million investment in and receivable from New Meadowlands Racetrack, including a $1.928 million note receivable with accrued interest. Potential concession rights tied to casino gaming are contingent on gaming approval and licensing. Sports betting began at the racetrack in June 2018.
Outlook, risks and contingencies
No quantified revenue, earnings or margin guidance was provided. Management said it was not committed to significant projects but may pursue opportunities depending on financing and other factors. The business is seasonal: winter quarters are generally weaker, while warm-weather sales benefit from outdoor dining but remain vulnerable to poor weather. Fixed costs do not fall proportionately with sales.
Risks discussed include economic conditions, competition, consumer preferences, weather, food-cost fluctuations, labor costs and minimum-wage changes, staffing, restaurant traffic, lease terms, licensing and regulatory compliance, and liquor-liability exposure. The filing’s Item 1A states “Not applicable,” although the forward-looking-statement discussion identifies these business uncertainties. Certain hotel operators represented 47% of accounts receivable at year-end; one vendor represented 10% of purchases in each comparative year. All debt was with one lender. The company disclosed ordinary-course accident, workers’ compensation and employment-related claims, and a Department of Labor examination of its savings plan; management did not expect material effects. The company reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.
Investor facts to verify
- Reconcile the narrative’s claim that same-store sales fell 1.7% with the table showing a 1.7% increase.
- Assess how sustainable earnings are after separating the $1.147 million tax benefit from recurring operating performance and considering the prior-year $1.637 million gain.
- Review refinancing terms, LIBOR exposure, debt maturities and covenants, and the substantial future lease-payment commitment.
- Monitor same-store trends and traffic weaknesses in Washington, D.C. and Boston, as well as weather, wage and occupancy-cost pressures.
- Confirm liquidity and dividend coverage against operating cash flow, capital spending and the working-capital deficit; the stated liquidity outlook runs only through December 31, 2019.
- Evaluate the recoverability and risk of the Meadowlands investment and receivable, including the contingent casino-related concession opportunity.