ARK Restaurants Corp. — Q2 FY2014 Form 10-Q
Reporting period: 13 and 26 weeks ended March 29, 2014; comparisons are to the periods ended March 30, 2013. Fiscal Q2 includes winter months, typically a slower season. Amounts below are in millions unless stated otherwise.
Business context and performance
At quarter-end, the company operated 21 restaurants and bars, 22 fast-food concepts and catering operations, all in the United States. It reports as one segment. The quarter included The Rustic Inn from its February 24 acquisition.
| Metric | 13 weeks ended Mar. 29, 2014 | Prior-year quarter | 26 weeks ended Mar. 29, 2014 | Prior-year half |
|---|---|---|---|---|
| Revenue | $31.037 | $29.090 | $63.176 | $60.426 |
| Operating income (loss) | $0.149 | $(0.282) | $1.351 | $0 |
| Consolidated net income (loss) | $0.150 | $(0.140) | $1.006 | $0.107 |
| Net income (loss) attributable to ARK | $(0.174) | $(0.265) | $0.389 | $(0.257) |
| Basic earnings (loss) per share | $(0.05) | $(0.08) | $0.12 | $(0.08) |
Quarterly revenue rose 6.7%, while company-wide same-store sales fell 1.5%. Operating margin was approximately 0.5% in the quarter and 2.1% for the half-year. Food and beverage costs rose to 27.0% of quarterly revenue from 25.6%; management attributed the increase to The Rustic Inn’s seafood cost structure. For the half-year, the comparable cost ratios were 25.7% and 25.1%.
Cash flow, liquidity and debt
- First-half operating cash flow was $3.445 million, versus $3.764 million. Investing used $3.462 million; financing used $3.164 million. Cash declined $3.181 million to $5.567 million.
- Working capital was negative $3.298 million at March 29, versus a $0.306 million surplus at September 28, 2013. Current assets were $12.762 million and current liabilities $16.060 million.
- Notes payable totaled $8.657 million: $2.325 million current and $6.332 million long-term. The Rustic Inn acquisition included a $6.0 million bank borrowing; the bank-note balance was approximately $7.949 million and the treasury-stock note approximately $0.708 million. The company reported compliance with debt covenants.
- Management said cash on hand and operating cash flow should be sufficient for liquidity and capital spending for at least the next 12 months.
Material changes and notable items
- The Rustic Inn was acquired for approximately $7.710 million. It contributed about $1.642 million of revenue and $0.352 million of earnings from acquisition through quarter-end. Acquisition transaction costs were approximately $0.150 million.
- Management attributed improved operating results to the acquisition, strong New York catering, improved performance at Clyde Frazier’s Wine and Dine, and prior-year Hurricane Sandy impacts. Offsetting factors included competition, fewer casino complimentary uses at Florida properties, and added Las Vegas hotel capacity without corresponding traffic growth.
- Same-store sales varied materially by market: New York +11.8%; Florida −11.2%; Washington, DC −9.4%; Las Vegas −2.4%; Connecticut −3.3%; Atlantic City +2.3%; Boston −1.0%.
- The company paid first-half dividends of $1.630 million and declared a quarterly dividend of $0.25 per share, paid April 4. Management intended to continue quarterly dividends, subject to board discretion and financial conditions.
- After quarter-end, the company loaned $1.5 million to Meadowlands Newmark LLC at 3% compounded monthly, due January 31, 2024.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management expects the effective tax rate for the fiscal year to be below the statutory rate, but said the final rate is uncertain. The company cited economic conditions, restaurant sales, labor and food costs, weather, consumer preferences and competition as factors that could affect results. Operations are seasonal; fixed costs do not decline proportionately with sales, and outdoor dining can be affected by weather. Commodity prices can be volatile; the company does not hedge with forward contracts.
Ordinary-course accident, workers’ compensation and employment-related claims are generally handled by insurance carriers; management did not expect their resolution to have a material adverse effect. A proposed acquisition of a Jupiter, Florida restaurant lease remained subject to landlord consent and acceptable lease amendments. The company reported no material changes to the risk factors in its 2013 Form 10-K and no material change to internal control over financial reporting.
Investor verification points
- Assess whether the working-capital deficit and higher borrowing remain manageable alongside acquisition spending, capital needs and dividends.
- Track same-store sales and cost trends, particularly Florida and Washington, DC, and the impact of food costs at The Rustic Inn.
- Review The Rustic Inn’s ongoing contribution and acquisition assumptions, including the $2.0 million goodwill and $0.5 million trademark allocation.
- Monitor the Meadowlands investment and the subsequent $1.5 million loan, including repayment prospects and exposure.
- Distinguish consolidated earnings from ARK-attributable earnings: non-controlling interests received $0.324 million of quarterly income and $0.617 million for the half-year.