ARK Restaurants Corp. — Q1 FY2015 Form 10-Q
Business context and reporting period. The unaudited quarter comprised 13 weeks ended December 27, 2014; comparisons are with the 13 weeks ended December 28, 2013. Ark operated 20 restaurants and bars, 19 fast-food concepts, and catering operations in the United States. Amounts below are in millions of dollars unless stated otherwise.
Key financial metrics
| Metric | Q1 FY2015 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $33.359 | $32.138 | +3.8% |
| Operating income | $1.219 | $1.201 | +1.5% |
| Operating margin | 3.7% | 3.7% | Approximately flat |
| Consolidated net income | $0.877 | $0.856 | +2.5% |
| Net income attributable to Ark | $0.722 | $0.563 | +28.2% |
| Diluted EPS | $0.21 | $0.17 | +23.5% |
| Operating cash flow | $1.766 | $2.059 | Down $0.293 |
Food and beverage sales were $33.050 million, up 4.1%; other revenue was $0.309 million, down 19.1%. Company-wide same-store sales declined 1.8%. Food and beverage costs were $8.747 million, or 26.2% of revenue, versus $7.854 million, or 24.4%, a year earlier. Payroll was $10.855 million (32.5% of revenue); occupancy was $4.193 million (12.6%). The effective tax rate was approximately 28%, versus 32%.
Cash and cash equivalents were $8.285 million at quarter-end. Current assets were $14.067 million and current liabilities $15.484 million, yielding a $1.417 million working-capital deficiency. Notes payable totaled approximately $6.871 million, including $1.751 million current and $5.120 million long-term. The company reported compliance with debt covenants. Total liabilities were $24.718 million.
Investing activities used $0.628 million, primarily for fixed-asset purchases and improvements at the Jupiter, Florida property. Financing activities used $1.515 million, including dividends, debt principal payments, and distributions to non-controlling interests. Cash declined $0.377 million during the quarter.
Material changes and management commentary
- Revenue growth included $3.192 million of sales from The Rustic Inn in Dania Beach, acquired in February 2014; the restaurant contributed approximately $0.436 million of earnings for the quarter.
- Operating income improved only modestly. Management cited Rustic Inn earnings and stronger performance at Clyde Frazier’s Wine and Dine, offset by reduced casino-funded complimentary usage, competition at Florida properties, and $0.200 million of pre-opening losses at the new Jupiter restaurant.
- Same-store sales varied by market: New York +5.1%, Washington, DC +3.9%, Las Vegas -1.6%, Connecticut -1.9%, and Florida -31.7%. Florida’s comparison excludes The Rustic Inn and was affected by reduced casino complimentary usage and increased competition.
- Four Las Vegas properties closed as leases expired: The Sporting House, Rialto Deli, Towers Deli, and Shake & Burger. Management reported no material closure charges.
- The company acquired assets and a lease for a Jupiter, Florida restaurant in July 2014, invested approximately $0.750 million in renovations, and opened it in late January 2015, after quarter-end.
Outlook, risks, and contingencies
Management said existing cash and operating cash flow should meet liquidity and capital-spending needs for at least the next 12 months. It provided no quantified earnings or revenue guidance. The company stated it intends to continue quarterly cash dividends for the foreseeable future, subject to board discretion and financial conditions; a $0.25-per-share dividend was declared, payable January 9, 2015.
Management highlighted seasonality, weather exposure, volatile food commodity prices, labor costs, consumer preferences, competition, and economic conditions as risks. Winter quarters typically have lower customer traffic; outdoor seating also exposes later quarters to adverse weather. Ordinary-course lawsuits and employment claims were disclosed, but management did not expect their resolution to materially affect financial position, results, or cash flows. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the higher food-cost ratio and Florida same-store sales decline persist, and how casino complimentary policies and competition affect results.
- The new Jupiter restaurant’s post-opening performance relative to its pre-opening costs and renovation investment.
- Whether operating cash flow can support planned capital spending, debt repayments, and the stated dividend intention despite the working-capital deficit.
- The terms, repayment schedule, and covenant headroom on the bank loan; the filing reports covenant compliance but does not provide a quantified cushion.
- The sustainability of same-store sales and the contribution from acquired or newly opened locations versus the effects of Las Vegas lease expirations.