ARK Restaurants Corp. — Q3 FY2011 Form 10-Q
Reporting period: 13 and 39 weeks ended July 2, 2011; comparisons are with the periods ended July 3, 2010. Dollar amounts below are in millions unless otherwise noted. The filing provides no formal earnings guidance.
Business context and reporting period
ARK operates restaurants in several U.S. markets. Results are seasonal: winter quarters generally have lower traffic, while outdoor dining makes warmer-season sales vulnerable to weather. Effective October 3, 2010, a change in VIE accounting required consolidation of two limited partnerships. Prior periods were not restated, making reported revenue comparisons less like-for-like.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | 39 weeks FY2011 | 39 weeks FY2010 |
|---|---|---|---|---|
| Revenue | $39.357 | $35.162 | $101.988 | $85.852 |
| Operating income | $3.119 | $4.321 | $1.778 | $1.876 |
| Income from continuing operations attributable to ARK | $2.283 | $2.916 | $0.699 | $1.521 |
| Net income attributable to ARK | $2.306 | $2.916 | $0.541 | $1.521 |
| Diluted EPS | $0.65 | $0.83 | $0.15 | $0.43 |
- Reported revenue rose about 12% in Q3 and 19% year to date, largely reflecting VIE consolidation. Excluding VIE revenue, management reported Q3 revenue of $33.462 million, down 4.8%, and 39-week revenue of $85.393 million, down 0.5%.
- Reported operating margin was about 7.9% in Q3 versus 12.3% a year earlier, and 1.7% year to date versus 2.2%. Management cited flood-related disruption at Sequoia DC, higher food costs, weather, and restaurant closures.
- Management reported Q3 same-store sales down 0.3% overall: Las Vegas +4.7%, New York −1.6%, Washington, D.C. −11.8%, Atlantic City +29.8%, and Boston +1.0%.
- Food costs as a share of revenue, excluding VIE costs as presented by management, were 27.6% for Q3 and 27.1% year to date, versus 25.6% in both comparable prior periods. Management attributed the increase to commodity prices. Payroll and occupancy percentages also rose in Q3.
- Year-to-date effective tax rate was approximately 12%, versus 32% in the prior year period. The company expected its full-year rate to be significantly below the statutory rate, partly because certain VIE income attributable to non-controlling interests is not taxable to ARK; the final rate remained uncertain.
Cash flow, liquidity and debt
- For the 39 weeks, operating cash flow was $3.601 million, investing cash flow was positive $3.170 million, and financing cash flow was negative $3.980 million. Cash increased $2.791 million to $4.802 million.
- Capital expenditures were $2.332 million; the company also paid $2.619 million in dividends and made $1.246 million in distributions to non-controlling interests.
- At July 2, cash and cash equivalents were $4.802 million and short-term available-for-sale securities were $2.694 million. Management reported working capital of $2.794 million excluding VIEs, down from $4.897 million at October 2, 2010.
- Note payable was $136,000 current and there was no long-term balance. Total liabilities were $16.424 million, including $3.515 million of operating lease deferred credit.
- The company paid three quarterly dividends of $0.25 per share during the period and said it intended to continue quarterly dividends, subject to board discretion and financial conditions.
Material changes, outlook, risks and unusual items
- VIE consolidation added $5.895 million of Q3 revenue and $16.595 million for the 39 weeks; the related operating expenses were $4.665 million and $13.188 million, respectively. The filing says VIE liabilities are claims on VIE assets, not additional claims on ARK’s general assets.
- Sequoia DC suffered a flood on April 17, 2011, disrupting business. Management expected substantially all losses to be recovered from insurance and/or the landlord and did not expect unrecovered amounts to be material.
- Polpette was sold April 28 for $400,000, including a four-year, $100,000 note bearing 6% interest. ARK recorded a $71,000 disposal loss and $148,000 in operating losses in discontinued operations year to date. Gonzalez y Gonzalez closed in January after the landlord required the company to vacate.
- Expansion plans include a New York restaurant expected to open in Q2 FY2012, with estimated construction costs of $4–5 million and landlord contributions of up to $1.8 million; a $3 million minimum food-court remodeling commitment due by March 2012, of which about $1.3 million had been spent through August 2011; and a Basketball City management agreement, with operations expected to begin in Q1 FY2012. The company had paid $400,000 of the agreement’s $1 million fee by July 2.
- On July 8, after quarter-end, ARK agreed to vacate The Grill Room property by October 3, 2011 in exchange for $350,000.
- During FY2011, ARK settled a claim for approximately $350,000 and accrued $150,000 for additional claims. Other ordinary-course litigation was described as not expected to materially affect results.
- Key risks include food commodity costs, labor expense, weather, consumer preferences, competition, economic conditions, and substantial fixed costs. Management reported no material change in previously disclosed risk factors, and disclosure controls were considered effective as of July 2, 2011.
Important facts for investors to verify
- Separate the underlying operating trend from the non-comparable VIE consolidation and assess the earnings attributable to non-controlling interests.
- Track the recovery, operating effects, and any remaining costs from the Sequoia DC flood.
- Verify spending and funding for committed remodeling and planned restaurant projects, alongside working-capital needs.
- Assess whether operating cash flow supports the stated dividend intention as capital spending and distributions continue.
- Monitor the outstanding employment-related claims, restaurant exits, and the terms and completion of the Grill Room vacatur.