ARK Restaurants Corp. — Q3 FY2016 Form 10-Q
Business and period: The quarter ended July 2, 2016 (13 weeks), with year-to-date results covering 39 weeks. Ark operated 21 restaurants and bars, 19 fast-food concepts, and catering operations in the United States. Amounts below are in thousands of dollars, except per-share data.
Financial performance
| Metric | 13 weeks ended July 2, 2016 | Prior-year 13 weeks | 39 weeks ended July 2, 2016 | Prior-year 39 weeks |
|---|---|---|---|---|
| Revenue | $41,233 | $40,375 | $111,614 | $105,282 |
| Operating income | $5,309 | $4,701 | $5,318 | $5,285 |
| Net income attributable to Ark | $3,367 | $3,241 | $3,043 | $3,381 |
| Diluted EPS | $0.96 | $0.92 | $0.87 | $0.97 |
| Operating cash flow | Not separately presented for the quarter | $6,288 | $6,533 |
- Quarter revenue rose 2.1%; year-to-date revenue increased 6.0%. Quarter operating income increased 12.9%, while year-to-date operating income was nearly flat. Ark-attributable net income rose for the quarter but fell 10.0% year to date.
- Reported operating margin was 12.9% for the quarter versus 11.6% a year earlier; year-to-date margin was 4.8% versus 5.0%. Quarter results include substantial favorable occupancy adjustments described below.
- Same-store food and beverage sales declined 1.6% in the quarter. Florida fell 10.7%, including traffic disruption from road construction near The Rustic Inn; Boston declined 11.2%. New York rose 1.5% and Atlantic City 6.9%.
- Food costs were 25.8% of revenue for the quarter (26.2% prior year), but payroll rose to 31.3% from 29.8%, which management attributed partly to labor-law changes and payroll at The Rustic Inn without corresponding sales growth.
Financial position, debt, and liquidity
- At July 2, 2016, cash was $8,519, total assets $69,599, and total equity $42,298. Cash decreased $1,216 from the fiscal-year-end balance of $9,735.
- Current assets were $17,079 and current liabilities $17,720, a working-capital deficit of $641; the company reported working capital of $129 at October 3, 2015.
- Notes payable totaled $8,546, comprising $2,571 current and $5,975 long-term, compared with $5,524 total at fiscal year-end. No additional borrowing was outstanding under the $10 million revolving facility as of July 2, 2016. The company reported compliance with its debt covenants.
- Year-to-date operating cash flow was $6,288, investing cash outflow $2,196, and financing cash outflow $5,308. Fixed-asset purchases were $1,482; the Shuckers acquisition used $717 of cash. Dividends paid were $2,565.
Material changes and unusual items
- Reported quarter operating income includes a $945,205 reversal of accrued commercial rent taxes after the state agreed to consent judgments that the taxes could not be imposed on the company’s food courts on federally protected Indian land. The filing records the reversal in occupancy expense and allocates related amounts to non-controlling interests and tax expense.
- The company also corrected an immaterial rent-liability overstatement of $261,000 ($191,000 net of tax); the filing says the correction affected quarterly and year-to-date EPS by $0.06 basic and $0.05 diluted. Together, the two favorable occupancy items exceed the quarter’s $608,000 year-over-year operating-income increase; results excluding these items are not provided.
- Shuckers, acquired in October 2015 for $5.717 million and partly financed with a $5 million bank loan, contributed approximately $1.286 million of quarter revenue and $116,000 of earnings. The Southwest Porch in Bryant Park also contributed to growth. Closures included V-Bar and Center Café, as well as earlier Las Vegas lease expirations.
- Shares outstanding were 3.418 million at July 2, versus 4.774 million issued shares and 1.356 million treasury shares at October 3, 2015; the company retired the treasury shares during the period.
Outlook, risks, and commitments
- Management said cash balances and operating cash flow should be sufficient for liquidity and capital needs for at least the next 12 months, despite the working-capital deficit. No earnings or revenue guidance was provided.
- The company intended to continue quarterly dividends of $0.25 per share, subject to board discretion and future financial conditions. A July 5, 2016 authorization permits repurchases of up to 500,000 shares over 12 months, funded from working capital.
- Sequoia in Washington, D.C. is scheduled to close for renovation and reconcepting from January through March 2017. Estimated project cost is $4 million to $5 million; the extended lease runs through November 2032, with annual rent of approximately $1.2 million, increasing over time.
- Risks cited include economic and market conditions, competition, labor and food costs, weather, consumer preferences, and seasonality. Outdoor seating makes weather a particular risk; management also noted increased competition and construction-related traffic impacts at certain locations.
- Management said ordinary-course legal claims were not expected to have a material adverse effect. The filing disclosed no material changes to the risk factors in the 2015 Form 10-K.
Investor verification points
- Assess underlying operating performance after the $945,205 tax accrual reversal and $261,000 rent-liability correction; the filing does not provide a complete adjusted earnings comparison.
- Track same-store sales and payroll trends, particularly Florida and Boston, and the duration and effect of the Florida road construction.
- Evaluate debt repayment and liquidity against the working-capital deficit, planned Sequoia renovation costs, dividends, and authorized share repurchases.
- Review the contribution and ongoing performance of Shuckers and other newer operations, and confirm future dividend and repurchase decisions.