ARK Restaurants Corp. — Q2 FY2016 Form 10-Q
Reporting period: 13 and 26 weeks ended April 2, 2016; comparable periods ended March 28, 2015. Dollar amounts are in thousands unless noted. The company operated 22 restaurants and bars, 19 fast-food concepts, and catering operations in the U.S.
Financial performance
| Metric | 13 weeks ended Apr. 2, 2016 | 13 weeks ended Mar. 28, 2015 | 26 weeks ended Apr. 2, 2016 | 26 weeks ended Mar. 28, 2015 |
|---|---|---|---|---|
| Revenue | $34,272 | $31,548 | $70,381 | $64,906 |
| Operating income (loss) | $(623) | $(634) | $9 | $585 |
| Net income (loss) attributable to Ark | $(646) | $(583) | $(324) | $140 |
| Basic and diluted EPS | $(0.19) | $(0.17) | $(0.09) | $0.04 |
| Operating cash flow | Not presented for quarter | $1,032 | $1,488 |
- Revenue rose 8.6% for the quarter and 8.4% year to date, principally reflecting Shuckers, the Bryant Park kiosk, and same-store sales, partly offset by restaurant closures.
- For the 26 weeks, payroll expense increased 13.8% to $25,205, faster than revenue growth; management cited labor-law changes and payroll at The Rustic Inn in Jupiter without a corresponding sales increase. Food and beverage costs were 26.7% of revenue versus 27.6% a year earlier, which management attributed primarily to price increases.
- Year-to-date operating margin was approximately 0.01%, down from 0.9% a year earlier. The second-quarter operating loss was slightly narrower than the prior-year loss.
Liquidity, debt and capital
- At April 2, 2016, cash was $5,924, current assets $14,191 and current liabilities $17,465, producing a working-capital deficit of $3,274 (versus working capital of $129 at October 3, 2015).
- Notes payable totaled $9,188: $2,571 current and $6,617 long-term. The company had no additional borrowing outstanding under its revolving facility and reported compliance with all debt covenants. Debt is secured by company assets and carries interest at LIBOR plus 3.5%.
- Cash declined $3,811 during the half-year to $5,924. Operating cash flow was $1,032; investing used $1,260, including $717 cash paid for Shuckers and $550 in fixed-asset purchases; financing used $3,583, including $1,710 of dividends, $1,225 of debt principal payments, and $518 of distributions to non-controlling interests.
- Management said existing cash and operating cash flow should meet liquidity and capital-spending needs for at least the next 12 months. The company intended to continue quarterly $0.25-per-share dividends, subject to board discretion and financial conditions.
Material changes, outlook and risks
- Shuckers was acquired in October 2015 for $5,717, funded with a $5,000 bank loan and cash. It contributed approximately $2,581 of revenue and $541 of earnings for the 26-week period, according to the MD&A; the financial-statement note reports approximately $2,581 of revenue and $546 of earnings.
- Same-store sales varied by market: New York and Washington, D.C. increased 14.0% and 16.6%, respectively; Las Vegas fell 1.6%, and Florida fell 9.3%. Management attributed Florida weakness in part to road construction near The Rustic Inn in Dania, expected to last about 18 months, and competition at a food-court location.
- Management cited seasonal winter traffic and substantial fixed costs. Outdoor seating also makes sales vulnerable to inclement weather. Other identified risks include labor costs, food-price volatility, changing consumer preferences, general economic conditions, and competition.
- Sequoia in Washington, D.C. is scheduled to close January 1 through March 31, 2017 for renovation and reconcepting. Estimated cost is $4,000–$5,000; the renewed lease runs through November 2032, with annual rent starting at approximately $1,200 and increasing annually.
- The company closed V-Bar in November 2015 and Center Café in February 2016 after lease issues; other Las Vegas properties had previously closed following lease expirations. Management reported no material charge for these closures.
- The first-half effective tax rate was approximately 65%, versus 28% in the prior-year period, reflecting low first-half income and discrete tax items. Management expected the full-year rate to be significantly below the statutory rate, but noted the final rate remained uncertain.
Important facts for investors to verify
- The filing’s narrative says company-wide same-store sales increased 1.9%, while the table’s $29,016 versus $28,724 implies approximately 1.0%; reconcile the stated rate and calculation.
- Confirm the difference in Shuckers’ reported first-half earnings: approximately $541 in the MD&A versus $546 in the financial-statement note.
- Assess the working-capital deficit, debt service and covenant headroom alongside management’s 12-month liquidity assertion and the planned Sequoia renovation expenditure.
- Monitor payroll-cost growth, Florida roadwork and traffic, market-level sales trends, and the company’s ability to sustain dividends while funding investment and debt repayments.