Business context and reporting period
ARK Restaurants Corp. operates restaurants, bars, fast-food concepts and catering businesses in the United States, reported as one segment. This Form 10-Q covers the 13 weeks ended June 28, 2014 (third quarter) and the 39 weeks ended that date; comparisons are with periods ended June 29, 2013. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Third quarter 2014 | Third quarter 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Revenue | $39.11 | $36.47 | $102.29 | $96.90 |
| Operating income | $3.37 | $4.39 | $4.73 | $4.39 |
| Net income attributable to ARK | $2.24 | $2.63 | $2.63 | $2.37 |
| Diluted EPS | $0.65 | $0.77 | $0.77 | $0.71 |
| Operating margin | 8.6% | 12.0% | 4.6% | 4.5% |
- Quarterly revenue rose 7.2%, but operating income fell 23.1%; higher costs outpaced sales growth. Food and beverage cost of sales increased 19.9% in the quarter and was 27.5% of revenue, versus 24.6% a year earlier.
- For the 39 weeks, revenue increased 5.6% and operating income increased 7.7%. Net income attributable to ARK rose 10.7%.
- Operating cash flow was $7.80 for the 39 weeks, compared with $7.89 a year earlier. Investing activities used $5.87 and financing activities used $3.94. Cash was $6.74 at June 28, down from $8.75 at September 28, 2013.
- Notes payable totaled $7.85, including $2.06 current and $5.79 long-term. The company reported compliance with debt covenants. Total assets were $62.84 and total equity was $37.15.
- Working capital was a deficit of $2.75, compared with a surplus of $0.31 at fiscal year-end. Management said cash balances and operating cash flow should meet liquidity and capital-spending needs for at least the next 12 months.
Material changes and operating developments
- The February 2014 acquisition of The Rustic Inn contributed $3.63 of quarterly revenue and $0.55 of quarterly earnings, and $5.28 of year-to-date revenue and $0.79 of earnings. Its approximately $7.71 purchase price was funded with a $6.00 bank loan and cash. The quarter’s results also included approximately $0.15 of acquisition transaction costs in general and administrative expense.
- Company-wide same-store sales declined 2.3% in the quarter. Florida same-store sales fell 26.1%, which management attributed to reduced casino complimentary use and increased competition. Las Vegas same-store sales declined 1.4%; New York, Washington, D.C., Atlantic City and Boston recorded increases.
- Management cited the Rustic Inn acquisition, strong New York catering, the Atlantic City restaurant opened in 2013 and prior-year Hurricane Sandy disruption as contributors to year-to-date revenue growth. Casino complimentary reductions, competition in Florida and additional Las Vegas room capacity without corresponding traffic weighed on results.
- The Sporting House and Rialto Deli closed in June 2014 after lease changes or expiration; neither closure resulted in a material charge. A restaurant and bar in Jupiter, Florida was acquired after quarter-end on July 18 for approximately $0.25, with a lease option extending through 2033.
Outlook, risks and contingencies
- The company intends to continue quarterly cash dividends; the board declared $0.25 per share for payment July 3, 2014. Future dividends remain subject to board discretion and financial conditions.
- Management expected the current fiscal-year effective tax rate to be below the statutory rate, citing tax credits and income attributable to non-controlling interests; the final rate remained uncertain.
- Key disclosed risks include seasonal demand and weather exposure, food-cost volatility, labor costs, competition, consumer preferences and economic conditions. Outdoor seating makes sales particularly weather-sensitive; fixed costs do not decline proportionately with sales.
- Ordinary-course accident, workers’ compensation and employment-related claims were disclosed; management did not expect their resolution to materially affect financial position, results or cash flows. No material changes to previously disclosed risk factors were reported.
- The company was evaluating new accounting guidance on discontinued operations and revenue recognition. It did not expect the stock-compensation guidance to have a significant impact.
Important facts for investors to verify
- Whether same-store sales and margins stabilize, particularly in Florida and Las Vegas, and how much future growth depends on acquisitions.
- Cash generation, the working-capital deficit and repayment of the acquisition-related bank borrowing; review applicable covenants and future capital needs.
- The acquired Rustic Inn’s ongoing contribution and integration costs, as well as the performance and terms of the post-quarter Jupiter acquisition.
- Whether the $0.25 quarterly dividend remains supported by cash flow, given debt service, capital spending and liquidity.
- Actual full-year tax rate and the impact of commodity prices, labor costs, weather and casino customer incentives on results.