ARK Restaurants Corp. — Q2 FY2017 Form 10-Q
Reporting period: 13 weeks ended April 1, 2017; year-to-date (YTD) is the 26 weeks ended that date. Comparatives are the periods ended April 2, 2016. Dollar amounts below are in millions unless otherwise noted.
Business context and reporting period
ARK operated 21 restaurants and bars, 19 fast-food concepts, and catering operations in the United States. It reports as one operating segment. Results include the Original Oyster House properties, acquired November 30, 2016. The company notes that its first and second fiscal quarters are typically seasonally slower.
Financial performance and position
| Metric | Q2 FY2017 | Q2 FY2016 | YTD FY2017 | YTD FY2016 |
|---|---|---|---|---|
| Revenue | $34.478 | $34.272 | $72.870 | $71.264 |
| Restaurant operating income (loss) | $(0.415) | $(0.623) | $0.890 | $0.009 |
| Operating income (loss) | $(0.415) | $(0.623) | $2.527 | $0.009 |
| Net income (loss) attributable to ARK | $(0.393) | $(0.646) | $1.341 | $(0.324) |
| Basic earnings (loss) per share | $(0.11) | $(0.19) | $0.39 | $(0.09) |
- Q2 revenue rose 0.6%; YTD revenue increased 2.3%. YTD operating income included a $1.637 million gain on sale of the Rustic Inn property in Jupiter; excluding that gain, restaurant operating income was $0.890 million versus $0.009 million a year earlier.
- Q2 same-store sales declined 3.0%. Las Vegas rose 6.8%, while New York fell 10.2% and Washington, D.C. fell 52.9%, primarily reflecting Sequoia’s renovation closure. Food costs were 28.5% of revenue in Q2 versus 26.8% a year earlier; payroll improved to 36.7% from 37.6%.
- YTD operating cash flow was $3.180 million, compared with $1.032 million. Investing used $5.300 million, including $4.565 million of fixed-asset purchases and $3.043 million paid toward the Oyster House acquisition, partly offset by $2.474 million of Rustic Inn sale proceeds. Financing used $4.304 million, including debt principal, dividends, and distributions to non-controlling interests.
- Cash fell to $0.815 million from $7.239 million at October 1, 2016. Current assets were $10.453 million and current liabilities $19.070 million, a working-capital deficiency of $8.617 million, versus $0.658 million at fiscal year-end.
- Notes payable totaled $14.282 million before deferred financing costs: $4.216 million current and $10.020 million long-term net of those costs. The $8.0 million Oyster House borrowing was under the bank facility; debt bears interest at LIBOR plus 3.5%.
Changes, outlook, risks, and unusual items
- The November 2016 Oyster House acquisition cost $10.750 million plus inventory and was partly debt-financed. The acquired properties contributed approximately $4.765 million of Q2 revenue and $6.445 million YTD revenue.
- Sequoia in Washington, D.C. was closed for renovation and reconcepting. Estimated project cost was $8–9 million, with approximately $3.9 million incurred by April 1; reopening was expected in June 2017. Management said existing cash and operating cash flow should meet liquidity and capital needs for at least 12 months.
- ARK did not meet its fixed-charge-coverage covenant at April 1, 2017; the lender issued a waiver on May 11. Management expected covenant compliance in 2017. The revolving facility expires October 21, 2017.
- Management intends to continue quarterly cash dividends, but future payments are discretionary. A $0.25-per-share dividend was declared for payment April 3, 2017.
- Risks highlighted include weak or changing consumer demand, competition, labor and food-cost inflation, adverse weather, seasonality, and the renovation-related interruption. The company also has ordinary-course legal claims, which management did not expect to materially affect results. Management reported no material changes to previously disclosed risk factors.
- ARK’s $5.108 million indirect investment in New Meadowlands Racetrack was not impaired. Its valuation depends in part on uncertain future casino approval and licensing; casino gaming had been rejected by voters in November 2016.
Important facts for investors to verify
- Whether operating cash generation and available borrowing can support the working-capital deficit, renovation spending, scheduled debt payments, and dividends.
- Compliance with the fixed-charge-coverage covenant after the waiver, and the status and terms of the bank facility approaching its October 2017 expiration.
- Sequoia’s actual reopening date, final renovation cost, and operating performance after reopening.
- Whether same-store sales stabilize, particularly in New York and Washington, D.C., and whether food-cost pressure persists.
- The Rustic Inn Jupiter vacate timing: the filing gives July 18, 2017 in one note and June 30, 2017 in MD&A.