ARK Restaurants Corp. — Q3 FY2022 Form 10-Q
Reporting period: 13 weeks ended July 2, 2022; year-to-date figures cover 39 weeks. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. The company operated 17 restaurants and bars, 17 fast-food concepts, and catering operations in the United States.
Financial performance
| Metric | Q3 FY2022 | Q3 FY2021 | 39 weeks FY2022 | 39 weeks FY2021 |
|---|---|---|---|---|
| Revenue | $53.22 | $42.97 | $136.79 | $89.03 |
| Operating income | $5.42 | $5.11 | $8.44 | $0.31 |
| Net income attributable to Ark | $5.26 | $2.67 | $8.52 | $6.07 |
| Diluted EPS | $1.46 | $0.73 | $2.37 | $1.68 |
| Cash from operating activities | — | $15.84 | $6.65 |
Q3 revenue rose 23.9%; company-wide same-store sales increased 21.7%. Year-to-date revenue increased 53.6%, with same-store sales up 51.5%. Management attributed growth to reopened operations without dining restrictions, customer traffic, targeted menu-price increases, and stronger New York and Washington, D.C. event business. Operating margin was approximately 10.2% in Q3 versus 11.9% a year earlier, and 6.2% year to date versus 0.3%.
Food and beverage costs declined as a share of revenue, but Q3 payroll and occupancy costs increased as a share of revenue. Management cited inflation in commodities, labor challenges, higher percentage rents, and related cost pressures. Q3 net income benefited from a lower income-tax provision than the prior-year quarter; both periods also included PPP loan-forgiveness income. Forgiveness income was $1.30 million in Q3 FY2022 versus $3.20 million in Q3 FY2021, and $2.42 million versus $7.32 million year to date.
Financial position and liquidity
- At July 2, 2022, cash and cash equivalents were $26.60 million, compared with $19.17 million at October 2, 2021. Working capital was $5.49 million, up from $2.57 million.
- Operating cash flow was $15.84 million year to date; investing activities used $1.77 million, principally for fixed-asset purchases. Financing activities used $6.63 million, including debt principal payments, dividends, and distributions to non-controlling interests.
- Notes payable totaled $24.97 million before deferred financing costs, versus $32.60 million at fiscal year-end; $6.69 million was current. Remaining PPP loans may not all qualify for forgiveness; $0.80 million was classified as expected to be repaid within 12 months.
- Operating lease liabilities totaled $77.91 million, including $6.35 million current. Total liabilities were $123.29 million. Lease commitments extend through 2046.
- The company paid a quarterly dividend of $0.125 per share in June 2022 and declared another $0.125 dividend for September 2022. Management said cash balances and banking facilities should fund liquidity and capital needs for at least the next 12 months.
Changes, outlook, and risks
Revenue and operating income improved from the prior comparable periods as restaurant activity recovered from prior-year COVID-19 restrictions. Year-to-date operating income also reflects the low prior-year comparison. Cost inflation and labor availability remain pressures, and management cautioned that menu-price increases may not fully offset future cost increases or be accepted without affecting customer behavior. All restaurants were operating without dining restrictions at the reporting date, but the company said renewed pandemic disruptions could materially affect operations, liquidity, debt-covenant compliance, and asset recoverability. No numerical earnings or revenue guidance was provided.
Lease extensions at two Las Vegas locations require minimum refresh spending of $1.5 million by September 2022 and $4.0 million by December 2024. A subsequent lease extension for three Las Vegas premises carries a further $3.5 million minimum refresh commitment by June 2023. The company also reported a settled New York labor-law class action awaiting final court approval; management believes ordinary-course legal matters will not have a material adverse effect. Other disclosed risks include food and labor inflation, supply disruptions, weather, consumer demand, restaurant competition, and potential debt refinancing or covenant challenges. The company reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales recovery and same-store growth persist, particularly as prior-year comparisons normalize and customer discretionary spending faces pressure.
- Whether inflation, labor costs, and percentage rents further compress operating margins, and how much pricing can offset these costs.
- PPP forgiveness decisions and the repayment schedule for any loans not forgiven; also monitor bank debt, covenant compliance, and refinancing needs.
- Cash requirements and timing for the approximately $9.0 million of disclosed restaurant refresh commitments, alongside lease obligations and dividends.
- Final court approval of the tipped-worker settlement and subsequent effects, if any.