ARK Restaurants Corp. — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended December 29, 2018, Ark’s first fiscal quarter of 2019; the comparable period ended December 30, 2017. The company operated 20 restaurants and bars, 19 fast-food concepts, and catering operations in the United States, reported as one segment.
Financial performance and position
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $40.548 million | $39.340 million |
| Operating income | $0.305 million | $0.882 million |
| Operating income excluding Durgin-Park closure loss | $1.372 million | $0.882 million |
| Net income (loss) attributable to Ark | $(0.062) million | $1.627 million |
| Diluted EPS | $(0.02) | $0.46 |
| Cash provided by operations | $0.840 million | $1.165 million |
Amounts are in U.S. dollars; financial statement figures are presented in thousands except per-share data. Revenue increased 3.1%, including 2.9% growth in same-store food and beverage sales. Reported operating margin was approximately 0.8%, versus 2.2% a year earlier; excluding the closure charge, it was approximately 3.4%. Food and beverage cost was 25.8% of revenue and payroll was 34.8%.
Investing activities used $0.619 million, including $0.554 million for fixed assets. Financing activities used $2.050 million, principally reflecting $1.736 million of dividends, debt principal payments, and distributions to non-controlling interests. Cash decreased $1.829 million during the quarter to $3.183 million.
At December 29, 2018, current assets were $10.795 million and current liabilities were $15.005 million, a $4.210 million working-capital deficiency. Notes payable totaled $20.945 million before current maturities and deferred financing costs; balance-sheet debt carrying value was $20.808 million. The revolver balance was $6.568 million, with a weighted-average rate of 5.5%. The company reported compliance with its financial covenants.
Material changes versus the prior comparable period
- Revenue rose $1.208 million, while total costs and expenses increased $1.785 million. Reported operating income fell 65.4%, primarily because of the Durgin-Park closure charge.
- Ark recorded a $1.067 million Durgin-Park loss: $0.721 million trademark impairment, $0.333 million accelerated depreciation, and $0.013 million prepaid-asset write-offs. The restaurant closed January 12, 2019.
- Same-store sales gains in Las Vegas (7.0%) and New York (2.4%) were offset in part by declines in Washington, D.C. (7.3%) and Connecticut (6.7%).
- Operating cash flow declined by $0.325 million, which management attributed to working-capital changes. The company paid a $0.25-per-share quarterly dividend, consistent with the prior-year rate.
Outlook, commentary, risks, and unusual items
Management stated that cash, banking facilities, and operating cash flow should be sufficient for liquidity and capital spending needs through at least February 12, 2020. It intended to continue quarterly cash dividends for the foreseeable future, but future dividends remain subject to board discretion and financial conditions. No specific earnings or revenue guidance was provided.
Management cited strong New York catering and continued strength at its Las Vegas properties, partly offset by higher labor costs. It identified general economic conditions, sales at new and existing restaurants, labor and food costs, weather, consumer preferences, and competition as factors that could affect results. The business is seasonal: winter quarters generally have lower traffic, while outdoor seating makes later quarters weather-sensitive.
One hotel operator accounted for 48% of accounts receivable at quarter-end. Ordinary-course lawsuits and employment-related claims were disclosed; management did not expect them to materially affect the company. The company expected adoption of the new lease accounting standard in fiscal 2020 to materially affect its balance sheet through recognition of operating-lease assets and liabilities. The quarter’s effective income tax rate was unusually high at approximately 287.5%; management noted that the full-year rate remained uncertain.
Important facts for investors to verify
- Whether Durgin-Park’s closure led to additional operating or disposal costs in the following quarter.
- Whether reported liquidity and covenant compliance remain adequate given the working-capital deficiency and scheduled debt payments.
- Whether same-store sales trends and labor costs support operating performance excluding the closure charge.
- Whether quarterly dividends remain affordable relative to operating cash flow, capital spending, and debt service.
- Whether the major hotel-operator receivable concentration and the New Meadowlands Racetrack investment present material collection or valuation risks.
- The eventual balance-sheet and disclosure effects of lease-standard adoption and the company’s full-year effective tax rate.