ARK Restaurants Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended June 29, 2019 (13 weeks), with year-to-date results for the 39 weeks ended June 29, 2019. Comparisons are with the corresponding periods ended June 30, 2018. Amounts below are in millions except per-share data.
Business context and financial results
Ark operated 20 restaurants and bars, 19 fast-food concepts, and catering operations in the United States. It reports as one operating segment.
- Quarter revenue: $44.807 million, essentially unchanged year over year. Operating income increased to $4.731 million from $3.786 million; net income attributable to Ark rose to $3.962 million from $2.657 million. Diluted EPS was $1.12 versus $0.75.
- Year-to-date revenue: $120.667 million, up 1.0%. Operating income was $5.114 million versus $4.107 million, despite a $1.106 million Durgin-Park closure charge. Net income attributable to Ark declined to $3.231 million from $3.648 million; diluted EPS was $0.92 versus $1.03. The prior-year period included a substantial one-time tax benefit.
- Margins: Operating margin was approximately 10.6% for the quarter versus 8.5%; year-to-date it was approximately 4.2% versus 3.4%. Year-to-date net margin attributable to Ark was approximately 2.7% versus 3.1%.
- Same-store sales: Decreased 1.5% in the quarter. Las Vegas, Alabama, and Florida grew; New York, Washington, D.C., Atlantic City, and Connecticut declined. Atlantic City was affected by new casino competition; New York and D.C. faced weather and traffic-related pressures.
- Costs: Quarterly payroll expense rose 1.2% and increased as a share of revenue, reflecting minimum-wage increases. Lower occupancy and other operating costs helped results; G&A rose 13.3%. Management cited rent renegotiation, cost reductions, and stronger Florida and Alabama performance as offsets to labor pressure and weaker New York results.
Cash flow, debt, and liquidity
- Year-to-date operating cash flow was $6.752 million, down from $7.575 million. Investing cash outflow was $2.575 million versus $4.638 million, primarily reflecting lower fixed-asset purchases. Financing cash outflow was $3.613 million versus $0.663 million of inflow, including dividends and debt principal payments.
- Cash was $5.576 million at June 29, 2019. Total bank notes and revolving-facility borrowings were $27.323 million before unamortized financing costs; the balance-sheet carrying amount was $27.152 million. The revolving facility had $6.396 million available and expires May 31, 2021. Its outstanding balance was $3.366 million, at a weighted-average rate of 5.2%.
- Working capital deficiency was $4.288 million, compared with $4.628 million at September 29, 2018. Management said cash, banking facilities, and operating cash flow should cover liquidity and capital spending needs through at least August 14, 2020. The company reported compliance with debt covenants.
- Quarterly cash dividends of $0.25 per share were declared in each of the first three fiscal quarters. Management said it intends to continue quarterly dividends, subject to the board’s discretion and future financial conditions.
Material developments, outlook, and risks
- JB’s on the Beach: Acquired May 15, 2019 for $7.036 million, funded mainly by a $7.0 million bank loan. Preliminary purchase accounting included $5.690 million of goodwill and $1.110 million of trademarks and remains subject to measurement-period adjustments. The acquired restaurant contributed approximately $1.239 million in quarterly revenue and a $52,000 year-to-date loss. Its lease runs 20 years, with annual rent of $600,000 and 10% increases every five years.
- Durgin-Park: Closed January 12, 2019 after management determined it could not be operated profitably amid lower traffic and rising labor costs. Year-to-date closure charges totaled $1.106 million, including impairment, accelerated depreciation, and write-offs.
- Outlook and seasonality: The filing provides no specific earnings or revenue guidance. Management noted seasonality, fixed costs, and potential weather impacts, particularly at outdoor-seating locations. It identified economic conditions, sales at existing and new restaurants, labor and food costs, weather, consumer preferences, and competition as risks. Management expects adoption of the new lease accounting standard in fiscal 2020 to significantly affect the balance sheet because of the company’s lease obligations.
- Litigation: A putative class action by former tipped workers alleges violations of New York labor laws. The company’s motion to dismiss was denied June 27, 2019. The company disputes the claims, but says possible losses cannot be estimated and has recorded no accrual.
- Other notable items: The quarter’s tax rate was affected by FICA tax credits and discrete state and local tax items. The company also has a 7.4% effective ownership interest in New Meadowlands Racetrack, subject to dilution; potential food-and-beverage concession rights depend on casino gaming approval and other conditions.
Important facts for investors to verify
- Whether same-store sales and labor-cost trends improve, especially in New York, D.C., and Atlantic City.
- Final purchase accounting and operating performance for JB’s on the Beach, including its lease and new debt burden.
- Liquidity, debt repayment capacity, covenant compliance, and continued availability under the revolving facility.
- Potential exposure and developments in the tipped-worker litigation, for which the filing provides no estimable loss range.
- Future dividend decisions and the balance-sheet effect of lease-standard adoption.