Business Context and Reporting Period
Company: Ark Restaurants Corp.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: 13 weeks ended January 1, 2011
Business Overview: The Company operates a portfolio of restaurants in major U.S. cities including New York, Las Vegas, Washington D.C., Atlantic City, and Boston. The business is seasonal, with lower traffic typically in the first and second fiscal quarters due to winter weather.
Key Financial Metrics
| Metric (in thousands) | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $32,541 | $25,576 |
| Operating Income | $58 | $(1,072) |
| Net Income (Loss) | $96 | $(807) |
| Net Loss Attributable to Ark Restaurants Corp. | $(213) | $(723) |
| Net Loss Per Share (Basic & Diluted) | $(0.06) | $(0.21) |
| Cash and Cash Equivalents (End of Period) | $1,321 | $158 |
| Working Capital Surplus | $2,881 | $4,897 |
| Total Debt (Notes Payable) | $248 | $302 |
Note: Q1 2011 figures include the consolidation of two Variable Interest Entities (VIEs) effective October 3, 2010, which contributed $4.767 million in revenue and $4.046 million in expenses.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 27.2% year-over-year. Excluding VIEs, organic revenue grew 8.6%, driven primarily by the new "Robert" restaurant in New York City and "The Sporting House" in Las Vegas.
- Profitability Improvement: The Company moved from an operating loss of $1.072 million in Q1 2010 to an operating income of $58,000 in Q1 2011. This turnaround was largely due to the inclusion of VIE operating income (~$700,000) and improved performance at the "Robert" location.
- Same Store Sales: Company-wide same store sales increased 0.5%.
- Increases: New York (+5.3%), Washington D.C. (+11.1%), and Boston (+8.0%) benefited from improved local economic conditions.
- Decreases: Las Vegas (-4.3%) and Atlantic City (-18.2%) declined due to reduced gaming activity and increased competition.
- Cost Structure:
- Food and beverage costs rose to 26.2% of revenue (vs. 25.5% prior year) due to higher commodity prices.
- Payroll expenses increased to 35.7% of revenue (vs. 35.1%) due to Las Vegas sales declines and start-up costs for new locations.
- Occupancy expenses decreased to 13.4% of revenue (vs. 16.5%) due to lower insurance premiums and fixed rents at higher-sales properties.
Guidance, Outlook, and Risks
- Accounting Change: The adoption of ASC Topic 810 amendments required the consolidation of two VIEs (Ark Hollywood/Tampa Investment, LLC and Ark Connecticut Investment, LLC). This significantly altered the comparability of financial results.
- Dividends: The Company paid a quarterly cash dividend of $0.25 per share in December 2010 and intends to continue paying quarterly dividends, subject to Board discretion and future earnings.
- Expansion and Closures:
- Openings: "The Sporting House" (Las Vegas) opened in October 2010; "The Broadway Burger Bar" (Las Vegas) opened in December 2010.
- Closures: The "Gonzalez y Gonzalez" property in New York closed in January 2011. The "Polpette" concept in New York closed in February 2011 after failing to meet sales targets.
- Risks and Contingencies:
- Legal: Approximately $500,000 is accrued for potential settlement of employment discrimination claims.
- Commitments: The Company is committed to spending at least $3.0 million to remodel a food court in Las Vegas by March 2012.
- Market Risk: Exposure to volatile commodity prices (chicken, beef, lobster, shrimp) and seasonal weather impacts on outdoor seating.
- Tax Outlook: The effective tax rate is expected to be 23% to 27% for the fiscal year, lower than the statutory rate due to non-controlling interests in VIEs. Tax returns for 2008 and 2009 are under IRS audit.
Investor Verification Checklist
- VIE Impact: Verify the sustainability of the $700,000 operating income contribution from the newly consolidated VIEs and understand the non-controlling interest allocation.
- Las Vegas Performance: Monitor the impact of reduced gaming activity and new competition on same-store sales in Las Vegas and Atlantic City.
- New Concept Viability: Assess the performance of "The Sporting House" and "The Broadway Burger Bar" against the failure of the "Polpette" concept.
- Liquidity Position: Review the decline in working capital surplus from $4.9 million to $2.9 million and the net cash outflow from operating activities ($481,000).
- Dividend Sustainability: Confirm that cash flows from operations and investment sales remain sufficient to support the $0.25 per share quarterly dividend policy.