ARK Restaurants Corp. — Form 10-Q Summary
Reporting period: Third fiscal quarter ended June 27, 2015 (13 weeks), with year-to-date results for the 39 weeks ended June 27, 2015. Comparatives are the periods ended June 28, 2014. The company operated 21 restaurants and bars, 19 fast-food concepts, and catering operations in the United States.
Financial performance
| Metric | 13 weeks ended June 27, 2015 | 13 weeks ended June 28, 2014 | 39 weeks ended June 27, 2015 | 39 weeks ended June 28, 2014 |
|---|---|---|---|---|
| Total revenue | $40.375 million | $39.110 million | $105.282 million | $102.286 million |
| Operating income | $4.701 million | $3.374 million | $5.285 million | $4.725 million |
| Net income attributable to ARK | $3.241 million | $2.239 million | $3.381 million | $2.627 million |
| Diluted earnings per share | $0.92 | $0.65 | $0.97 | $0.77 |
| Operating margin | 11.6% | 8.6% | 5.0% | 4.6% |
- Quarterly revenue increased 3.2%, operating income increased 39.3%, and ARK-attributable net income increased 44.8% year over year. Year-to-date revenue increased 2.9%, operating income 11.9%, and attributable net income 28.7%.
- Quarterly same-store food and beverage sales increased 2.2% overall: New York rose 6.7%, Atlantic City 9.2%, and Las Vegas declined 0.8%.
- For the 39-week period, operating cash flow was $6.533 million, compared with $7.804 million. Investing activities used $2.456 million and financing activities used $5.153 million; cash decreased $1.076 million to $7.586 million.
- At June 27, cash was $7.586 million, current assets $15.330 million, and current liabilities $15.634 million, representing a $304,000 working-capital deficit. Total notes payable were $5.928 million, down from $7.318 million at September 27, 2014. Total liabilities were $23.846 million and total equity was $40.345 million.
Material changes and operating drivers
- Management attributed quarterly operating-income growth to a $432,000 improvement at The Rustic Inn in Dania Beach, strong performance at other properties, favorable weather, and strong New York catering, partly offset by about $175,000 in losses at the new Jupiter restaurant.
- Year-to-date results include $11.919 million of revenue and $2.656 million of earnings from The Rustic Inn in Dania Beach. The Jupiter Rustic Inn, opened in January 2015, recorded $841,000 of pre-opening and early operating losses year to date.
- Food and beverage costs as a share of revenue improved in the quarter, but rose year to date, partly because the seafood restaurants have higher food-cost structures. Management said costs excluding those restaurants were consistent with the prior-year periods.
- Four Las Vegas properties closed following lease expirations. The company opened a Bryant Park food-and-beverage kiosk in July 2015 after approximately $400,000 in renovations.
- On August 6, 2015, the company paid $543,550, including a $143,550 security deposit, to assume a New York event-space lease through March 2026, with an extension option and annual rent of approximately $300,000.
Outlook, risks and other notable items
- Management said existing cash and operating cash flow should be sufficient for liquidity and capital-spending needs for at least the next 12 months. No specific revenue or earnings forecast was provided.
- The company intends to continue quarterly cash dividends, subject to board discretion and future earnings, cash flow, financial condition, capital needs, tax changes, and other factors. A $0.25-per-share dividend was declared for payment July 3, 2015.
- Management cited seasonality, weather, general economic conditions, restaurant sales, labor costs, food-price volatility, changing consumer preferences, and competition as risks. Outdoor seating makes weather particularly relevant; the company does not hedge commodity purchases with forward contracts.
- The company reported compliance with all bank debt covenants at June 27, 2015. Ordinary-course legal claims include restaurant accidents, workers’ compensation, and employment-related matters; management does not expect them to have a material adverse effect.
- The quarter’s tax provision included an approximately $130,000 discrete benefit, primarily from state tax-law changes. The company expects its full-year effective tax rate to be significantly below the statutory rate, but the final rate remains uncertain.
- The company corrected an immaterial gift-card-liability overstatement of $224,000 ($161,000 after tax, or $0.05 per share) identified in the quarter ended March 28, 2015; it concluded prior-period financial statements were not materially misstated.
Important facts for investors to verify
- Whether cash generation and the stated 12-month liquidity outlook remain adequate given the working-capital deficit, lease commitments, planned capital spending, and dividends.
- Whether the Jupiter restaurant’s early losses improve and whether newer locations and the Bryant Park kiosk contribute profitably.
- Whether same-store sales and cost trends persist, particularly food costs at seafood restaurants and results in Las Vegas and Florida.
- The ongoing affordability of dividends alongside debt repayments and investment commitments, including the Meadowlands investment and loan.
- How the August 2015 event-space lease and any other expansion commitments affect future rent expense and cash requirements.