ARK Restaurants Corp. — Q1 Fiscal 2014 Form 10-Q
Reporting period: 13 weeks ended December 28, 2013; comparative period ended December 29, 2012. Fiscal Q1 includes winter months, which typically have lower customer traffic. Unless noted, amounts are in millions of dollars.
Business context and results
ARK operated 20 restaurants and bars, 22 fast-food concepts, and catering operations in the United States, reported as one operating segment. Revenue rose 2.6% to $32.138 million. Company-wide same-store sales increased 1.8%.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Food and beverage sales | $31.756 | $31.029 | +2.3% |
| Operating income | $1.201 | $0.282 | +$0.919 |
| Operating margin | 3.7% | 0.9% | +2.8 percentage points |
| Income before taxes | $1.255 | $0.361 | +$0.894 |
| Consolidated net income | $0.856 | $0.247 | +$0.609 |
| Net income attributable to ARK | $0.563 | $0.008 | +$0.555 |
| Diluted EPS | $0.17 | $0.00 | +$0.17 |
Cash flow, balance sheet, and liquidity
- Operating cash flow was $2.059 million, compared with $1.504 million. Investing activities used $1.817 million and financing activities used $1.530 million; cash decreased $1.288 million to $7.460 million.
- At December 28, cash was $7.460 million, current assets $13.083 million, and current liabilities $13.957 million, producing a $0.874 million working-capital deficit. The company reported a $0.306 million surplus at September 28, 2013.
- Notes payable totaled $3.141 million ($1.974 million current and $1.167 million long-term), down from $3.657 million at September 28. The bank note is secured by company assets, bears interest at LIBOR plus 3%, and has financial covenants; ARK said it was in compliance at quarter-end.
- Total assets were $54.903 million and total equity was $35.270 million. The company paid $0.814 million in dividends and declared a quarterly dividend of $0.25 per share.
Material changes and management commentary
Operating income improved by $0.919 million year over year. Management cited strong New York catering, improved performance at Clyde Frazier’s Wine and Dine, and prior-year Hurricane Sandy disruption and closure costs. These benefits were partly offset by competition, reduced casino complimentary usage at Florida properties, and increased Las Vegas room capacity without corresponding traffic growth. Prior-year other operating costs included $0.256 million of losses from the Sandy-related closure of two New York properties.
Same-store sales varied by market: New York +15.8%, Atlantic City +32.2%, Las Vegas -3.5%, Florida -11.6%, Washington, DC -0.3%, Boston +0.4%, and Connecticut -1.8%. Payroll and occupancy costs declined as a share of revenue; general and administrative expense rose 18.3%, primarily from higher salaries, benefits, and professional fees. Food costs reflected improved menu costing partly offset by higher commodity prices.
Outlook, transactions, and risks
- No specific earnings or revenue guidance was provided. Management stated that cash balances and operating cash flow should cover liquidity and capital needs for at least the next 12 months. It intends to continue quarterly dividends, subject to board discretion and financial conditions.
- ARK had agreed to buy the Rustic Inn Crab House in Dania Beach, Florida, for $7.5 million plus inventory, with closing expected by February 28, 2014, subject to due diligence, regulatory approval, and other conditions. A $0.5 million deposit had been paid; the remaining price was expected to be funded with bank borrowings.
- In November 2013, ARK invested an additional $0.464 million in New Meadowlands Racetrack LLC, bringing its ownership to 11.6%. Its total investment was $4.664 million; management reported no impairment indication. Maximum exposure related to its separate management-services involvement was a $0.321 million receivable.
- After quarter-end, ARK agreed to purchase a restaurant and bar in Jupiter, Florida, for $0.250 million; the agreement was subject to landlord consent and lease conditions, and a $0.050 million deposit was made.
- Key risks include seasonal traffic and weather exposure, competition, labor and food-cost fluctuations, casino customer traffic and complimentary policies, and lease obligations. Ordinary-course legal matters were not expected by management to have a material adverse effect. Management reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether the Rustic Inn acquisition closed on the stated terms and how its debt financing affected liquidity and leverage.
- Whether the working-capital deficit and cash decline remain manageable as ARK funds capital spending, investments, and dividends.
- Whether New York catering strength is sustainable and whether weakness in Las Vegas and Florida persists.
- Actual full-year tax rate versus management’s expectation of a rate below the statutory rate; the quarter’s effective rate was approximately 32%.
- Progress and financial exposure relating to the Jupiter acquisition, Meadowlands investment, and the $0.321 million receivable associated with Meadowlands services.