ARK Restaurants Corp. 10-Q Summary
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the 13-week and 26-week periods ended April 2, 2011. Ark Restaurants Corp. operates a portfolio of restaurants in major U.S. cities including New York, Las Vegas, Washington D.C., Boston, and Atlantic City. The company is classified as a smaller reporting company. A significant accounting change occurred effective October 3, 2010, with the adoption of amendments to ASC Topic 810, requiring the consolidation of two Variable Interest Entities (VIEs): ArkHollywood/Tampa Investment, LLC and ArkConnecticut Investment, LLC.
Key Financial Metrics
| Metric | 13 Weeks Ended Apr 2, 2011 |
13 Weeks Ended Apr 3, 2010 |
26 Weeks Ended Apr 2, 2011 |
26 Weeks Ended Apr 3, 2010 |
|---|---|---|---|---|
| Total Revenues | $30,219 | $25,113 | $62,632 | $50,689 |
| Operating Loss | $(1,525) | $(1,372) | $(1,342) | $(2,445) |
| Net Loss (Ark Restaurants) | $(1,553) | $(671) | $(1,765) | $(1,395) |
| Net Loss Per Share (Basic) | $(0.44) | $(0.19) | $(0.51) | $(0.40) |
| Cash and Equivalents | $2,672 | $2,562 | $2,672 | $2,562 |
| Working Capital | $1,554 | $4,897 | $1,554 | $4,897 |
| Debt (Current Portion) | $192 | $224 | $192 | $224 |
Note: All figures in thousands except per share data. Working capital calculated as Current Assets ($13,188) minus Current Liabilities ($11,634).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 20.3% for the 13-week period and 23.6% for the 26-week period compared to the prior year. However, excluding the newly consolidated VIEs, revenues actually decreased 2.6% (13 weeks) and increased only 2.8% (26 weeks) due to the closure of the Gonzalez y Gonzalez restaurant and poor weather conditions affecting outdoor seating.
- Profitability: The company reported a Net Loss attributable to Ark Restaurants of $1.55 million for the quarter, compared to $0.67 million in the prior year. This widening loss is primarily attributed to the consolidation of VIEs, which reduced operating income previously recognized as management fees, and increased costs associated with new restaurant openings.
- Cost Structure: Food and beverage costs rose to 27.4% of revenue (excluding VIEs) from 25.8% in the prior year due to higher commodity prices. Payroll expenses increased to 38.7% (excluding VIEs) from 35.0%, driven by start-up costs at The Sporting House in Las Vegas.
- Liquidity: Working capital decreased significantly from $4.9 million to $1.6 million, largely due to a reduction in short-term investments (from $7.4 million to $2.6 million) and an increase in accrued expenses.
Guidance, Outlook, and Risks
- Outlook: Management expects the effective tax rate for the fiscal year to be significantly lower than the statutory rate due to non-taxable operating income from VIE non-controlling interests. The company intends to continue paying quarterly cash dividends of $0.25 per share, subject to Board discretion.
- Expansion: The company opened "The Sporting House" in Las Vegas (Oct 2010) and "The Broadway Burger Bar" (Dec 2010). A new restaurant in New York City is leased and expected to open in Q1 of fiscal 2012, with a landlord contribution of up to $1.8 million toward construction.
- Dispositions: The company closed the Gonzalez y Gonzalez location in January 2011 and the Polpette location in February 2011. Polpette was sold in April 2011 for $400,000, resulting in a $71,000 loss recorded in discontinued operations.
- Risks and Contingencies:
- Weather: Operations are highly seasonal and dependent on weather, particularly for outdoor seating.
- Legal: The company settled a claim for approximately $350,000 in Q2 and maintains a $150,000 accrual for additional claims.
- Subsequent Event: A flood occurred at the Sequoia property in Washington, D.C., on April 17, 2011. Management expects to recover substantially all losses through insurance.
Investor Verification Checklist
- VIE Consolidation Impact: Verify the specific financial impact of consolidating ArkHollywood/Tampa and ArkConnecticut Investment entities on future quarters, as this significantly altered revenue and expense recognition.
- Weather Sensitivity: Assess the correlation between local weather patterns in key markets (NYC, DC, Boston) and quarterly revenue fluctuations.
- Dividend Sustainability: Review cash flow from operations against the $1.75 million in dividends paid over the 26-week period to ensure sustainability given the operating losses.
- Discontinued Operations: Confirm the final sale price and terms of the Polpette restaurant and any remaining liabilities associated with the Gonzalez y Gonzalez closure.
- Insurance Recovery: Monitor the resolution of the flood claim at the Sequoia property to ensure the expected insurance recovery materializes.