ARK Restaurants Corp. — Q2 FY2012 Form 10-Q
Business context and period: The filing covers the 13 and 26 weeks ended March 31, 2012, compared with periods ended April 2, 2011. Ark operated 21 restaurants and bars, 22 fast-food concepts, and catering operations in the United States. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | 13 weeks ended Mar. 31, 2012 | Prior-year period | 26 weeks ended Mar. 31, 2012 | Prior-year period |
|---|---|---|---|---|
| Revenue | $29.891 | $29.438 | $62.602 | $61.166 |
| Operating income (loss) | $0.084 | $(1.107) | $1.522 | $(0.606) |
| Income (loss) attributable to Ark | $(0.404) | $(1.553) | $0.683 | $(1.765) |
| Net income (loss) per share | $(0.12) | $(0.44) | $0.20 | $(0.50) |
- Revenue increased 1.5% for the quarter and 2.3% for the half-year. Company-wide same-store sales rose 8.2% in the quarter.
- Operating margin was approximately 0.3% for the quarter, versus negative 3.8% a year earlier; for the half-year, approximately 2.4% versus negative 1.0%.
- Quarterly food and beverage costs fell to 25.7% of revenue from 27.5%; payroll costs fell to 34.6% from 35.8%. For the half-year, food costs were 25.6% versus 26.9% and payroll was 33.6% versus 34.9%.
- Discontinued operations generated losses of $0.309 million for the quarter and $0.436 million for the half-year, versus $0.426 million and $0.763 million, respectively, in the prior-year periods.
Cash flow, liquidity and debt
- For the first 26 weeks, operating cash flow was $2.464 million, compared with cash used of $0.851 million a year earlier. Investing activities used $4.089 million, including $6.263 million of fixed-asset purchases; financing activities used $2.905 million.
- Cash and cash equivalents were $3.250 million at March 31, down from $7.780 million at October 1, 2011. Short-term investments were $0.075 million, versus $2.699 million.
- Working capital was negative $2.113 million, compared with positive $4.080 million at fiscal year-end. Current assets were $10.789 million and current liabilities $12.902 million.
- Debt included a $2.125 million unsecured note issued to fund a treasury-stock purchase, with $0.354 million current and $1.771 million long-term. The note bears 0.19% interest and is payable in 24 monthly installments beginning December 2012.
- Total assets were $52.551 million and total liabilities $18.998 million at March 31, 2012.
Material changes and unusual items
- Quarterly operating results improved by $1.191 million year over year. Management cited favorable weather, improving Las Vegas conditions, and improved menu costing, partly offset by approximately $0.770 million of pre-opening and early operating losses at Clyde Frazier’s Wine and Dine and $0.475 million of compensation tied to the President and COO’s departure.
- Clyde Frazier’s opened during the quarter; construction costs were approximately $6.5 million, and the landlord had contributed $1.0 million toward a commitment of up to $1.8 million. The lease runs through March 2027, with one five-year renewal option.
- The company closed its Grill Room and America properties in the first fiscal quarter, and vacated its Foxwoods food-court operations on March 15, 2012 because management concluded the location could not be profitable at the prevailing rent.
- Ark repurchased 250,000 shares for $3.125 million, paying $1.0 million in cash and issuing the $2.125 million note. It also paid $0.811 million in dividends during the half-year and recorded a further $0.812 million dividend payable at quarter-end; that dividend was paid April 4, 2012.
- Management said existing cash, investments, and operating cash flow should meet liquidity and capital-spending needs for at least 12 months. It intended to continue quarterly dividends, subject to board discretion and future conditions.
Outlook, risks and contingencies
- Management expects the fiscal-year effective tax rate to be significantly below the statutory rate, but noted the final rate remains uncertain.
- The company committed to spend at least $3.0 million remodeling its New York-New York Hotel and Casino food court during 2012; approximately $1.5 million had been spent by March 31.
- Ark expected to begin operating a restaurant and catering service at Basketball City in New York City within the next 12 months; elsewhere the filing specifies the fourth quarter of fiscal 2012.
- Key risks cited include economic conditions and customer traffic, food commodity and labor costs, weather, changing consumer preferences, and competition. The company noted seasonality and substantial fixed costs; outdoor seating can make results weather-sensitive. Two suppliers accounted for approximately 24% of purchases in the current half-year.
- Management reported ordinary-course accident, workers’ compensation, and employment-related claims, but did not expect their resolution to materially affect financial position, results, or cash flows. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether improved same-store sales and operating margins persist beyond the winter quarter, and how new-restaurant losses develop.
- Cash generation and working-capital needs alongside planned remodeling and other capital expenditures.
- Repayment of the treasury-stock note, the impact of ongoing share repurchases, and the sustainability of quarterly dividends.
- Progress on the Basketball City opening and completion of the food-court remodeling commitment.
- Potential future costs from commodity, labor, weather, supplier-concentration, and legal risks.