ARK Restaurants Corp. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 27, 2014 (52 weeks); comparable year ended September 28, 2013. This is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Business context
ARK owned and operated 20 restaurants and bars, 21 fast-food concepts, and catering operations across U.S. markets. The company reports one aggregated operating segment. The Rustic Inn, acquired in February 2014, contributed approximately $8.753 million in revenue and $1.301 million in operating income from acquisition through year-end.
Financial results and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Total revenue | $139.357 million | $130.598 million | +6.7% |
| Operating income | $7.628 million | $6.606 million | +15.5% |
| Income before taxes | $7.960 million | $7.052 million | +12.9% |
| Consolidated net income | $6.185 million | $5.111 million | +21.0% |
| Net income attributable to ARK | $4.915 million | $3.825 million | +28.5% |
| Diluted EPS | $1.43 | $1.13 | +26.5% |
| Operating cash flow | $11.905 million | $13.059 million | −8.8% |
- Operating margin was approximately 5.5%, versus 5.1% in FY2013; net margin attributable to ARK was approximately 3.5%, versus 2.9%.
- Food and beverage cost of sales rose 13.1% to $37.091 million, or 26.6% of revenue versus 25.1%. Management cited the higher food-cost structure at The Rustic Inn; excluding that effect, the cost ratio still increased 0.4 percentage points.
- Company-wide same-store food and beverage sales increased 0.5%. Regional results varied: New York +9.9%, Atlantic City +9.1%, Florida −18.7%, and Las Vegas −1.6%. New York benefited from catering and weather; Florida faced reduced casino complimentary usage and greater competition.
- Cash and cash equivalents were $8.662 million at year-end, compared with $8.748 million a year earlier. Working capital was a deficit of $1.303 million, versus a $0.306 million surplus. Management said cash balances and operating cash flow should cover liquidity and capital needs for at least 12 months.
- Notes payable totaled $7.318 million, including $1.794 million current and $5.524 million long-term, compared with $3.657 million total a year earlier. The company borrowed $6.0 million in connection with The Rustic Inn acquisition; the bank loan bears interest at LIBOR plus 3.5%. ARK reported compliance with debt covenants at year-end.
- Investing cash outflow was $6.692 million; financing cash outflow was $5.299 million. Capital spending included restaurant fixed assets, the Rustic Inn acquisition, and investments and a loan connected to Meadowlands.
Material changes and unusual items
- Revenue growth reflected The Rustic Inn, the Atlantic City Broadway Burger Bar and Grill opened in 2013, stronger New York catering, and recovery from Hurricane Sandy-related weakness in the prior year. Closures of The Sporting House and Rialto Deli in 2014 had no material closure charges.
- Operating income improved with Rustic Inn’s contribution, catering strength, and improved Clyde Frazier’s Wine and Dine performance, partly offset by weaker Florida results and Las Vegas traffic pressure. FY2013 included $256,000 of closure losses related to flood-damaged Red and Sequoia properties.
- ARK acquired The Rustic Inn for approximately $7.710 million, financed with a $6.0 million bank loan and operating cash. It also acquired assets and a lease for a Jupiter, Florida restaurant for approximately $250,000; renovations were estimated at $750,000.
- ARK invested a total of $4.664 million for an 11.6% interest in Meadowlands Newmark/NMR and loaned Meadowlands Newmark $1.5 million at 3% interest, compounded monthly, due in 2024. A potential exclusive food-and-beverage concession opportunity at a gaming facility depends on gaming approval and related rights being granted.
- The board declared quarterly dividends of $0.25 per share during the year, equivalent to $1.00 per share for FY2014. Future dividends remain subject to board discretion and financial conditions.
Outlook, risks, and contingencies
- No specific numerical revenue or earnings guidance was provided. Management said it had no significant projects to which it was currently committed, while retaining the possibility of pursuing opportunities based on financing and other factors. The Jupiter restaurant was expected to open in the first quarter of FY2015.
- Key disclosed risks include discretionary consumer spending, intense competition, food and labor cost inflation, minimum-wage and healthcare costs, weather and seasonality, labor availability, and dependence on casino traffic. Management noted Atlantic City’s casino downturn and closures, though ARK’s existing Atlantic City same-store sales rose 9.1% in FY2014, excluding the new restaurant.
- The business is seasonal: winter quarters generally have lower traffic; outdoor dining makes warm-season sales vulnerable to poor weather. Future minimum lease payments under noncancelable leases totaled $63.1 million, including $9.23 million in FY2015.
- Ordinary-course accident, workers’ compensation, and employment-related claims were disclosed. Management did not expect the matters to materially affect financial position, results, or cash flows. The filing does not identify a material pending contingency.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor gave an unqualified opinion on the financial statements; the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether the Rustic Inn’s post-acquisition performance and Florida same-store sales weakness continued after FY2014.
- Debt service, floating-rate exposure, covenant headroom, and the effect of the working-capital deficit alongside the dividend policy.
- Whether the Jupiter opening occurred on schedule and within the estimated renovation budget, and whether it incurred material start-up losses.
- Progress and collectability of the Meadowlands investment and loan, and whether gaming approval or concession rights were obtained.
- Regional same-store sales trends, food-cost inflation, labor-cost changes, and the sensitivity of outdoor dining to weather.
- Lease renewal and expiration exposure, including the $63.1 million of disclosed future minimum lease payments.