ARK Restaurants Corp. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017, comprising 52 weeks; comparison is the 52 weeks ended October 1, 2016. The filing is an annual report, not a standalone fourth-quarter report.
Business context
ARK owned and/or operated 20 restaurants and bars, 19 fast-food concepts and catering operations across U.S. markets. The company acquired two Original Oyster House locations in Alabama in November 2016 and reopened Washington, D.C.’s Sequoia after a major renovation.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $153.877 million | $150.582 million |
| Restaurant operating income, before gain on sale | $5.371 million | $7.824 million |
| Operating income | $7.008 million | $7.824 million |
| Net income attributable to ARK | $4.039 million | $4.030 million |
| Basic / diluted EPS | $1.18 / $1.14 | $1.18 / $1.15 |
| Cash from operations | $10.350 million | $7.613 million |
- Revenue rose 2.2%, while company-wide same-store food and beverage sales fell 3.3%. Food and beverage sales were $151.196 million; other revenue was $2.681 million.
- Operating margin was approximately 4.6% including the $1.637 million gain on sale of the Rustic Inn Jupiter property; restaurant operating margin before that gain was approximately 3.5%. Net margin attributable to ARK was approximately 2.6%.
- Costs increased faster than revenue: food and beverage costs rose 5.2% and payroll rose 4.6%. Food cost was 27.0% of revenue versus 26.3% in FY2016; payroll was 34.5% versus 33.7%.
- Cash used in investing was $14.641 million, mainly for capital spending, Sequoia renovation and the Oyster House acquisition, partly offset by property-sale proceeds. Cash used in financing was $1.542 million. Cash declined to $1.406 million from $7.239 million.
- At year-end, current assets were $10.083 million and current liabilities $26.155 million, a working-capital deficiency of $16.072 million, compared with $0.658 million a year earlier. Total notes payable were $12.040 million, plus $6.198 million borrowed under the credit facility.
Material changes and unusual items
- Operating income declined 10.4%, despite higher revenue. Sequoia’s renovation closure and related losses, plus the absence of prior-year rent-tax benefits, were significant factors. The prior year included a $945,000 reversal of commercial rent tax accruals and a $261,000 rent-liability correction.
- Sequoia was closed for renovation from January through June 2017; renovation costs were approximately $11 million. Washington, D.C. same-store sales fell 38.9%, largely reflecting the closure.
- The two Alabama Oyster House properties contributed approximately $11.804 million of revenue and $1.243 million of operating income after their November 2016 acquisition. The Rustic Inn Jupiter property sale generated a $1.637 million gain.
- Reported net income attributable to ARK was nearly unchanged year over year, while consolidated net income declined to $4.757 million from $5.490 million. Interest expense increased to $753,000 from $416,000.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance was provided. Management said existing cash, banking facilities and operating cash flow should cover liquidity and capital needs through at least December 31, 2018, and expected to increase facility availability and refinance borrowings in 2018.
- After year-end, the revolving facility’s stated availability limit was amended from $10 million to $12 million, subject to the facility’s borrowing formula. The lender waived a fiscal-year-end fixed-charge coverage covenant breach on December 21, 2017; the company reported compliance with its other financial covenants.
- The company intended to continue quarterly dividends of $0.25 per share, subject to board discretion and financial conditions. It paid or accrued $1.00 per share for FY2017.
- Key risks include weak discretionary spending, competition, food and labor cost inflation, minimum-wage and paid-leave requirements, adverse weather and seasonality, dependence on casino traffic and key personnel, and the effects of expansion. Outdoor dining makes weather particularly relevant.
- ARK had invested $5.108 million in New Meadowlands Racetrack and loaned its affiliate $1.7 million. The hoped-for casino opportunity remained uncertain after a 2016 referendum defeat; further capital calls could require additional investment or dilute ARK’s interest. Management recorded no impairment, based on estimates that included the likelihood of casino approval.
- The Tax Cuts and Jobs Act was enacted after fiscal year-end. The company was assessing its effects and expected to record a discrete deferred-tax remeasurement benefit in the quarter ending December 31, 2017; the ultimate effect was not yet clear.
Important facts for investors to verify
- Progress and terms of the planned refinancing, available borrowing capacity, and the company’s compliance with lender covenants.
- Whether Sequoia’s reopening and the acquired Alabama locations sustain expected operating performance, and whether same-store sales stabilize.
- Cash generation after substantial renovation and acquisition spending, given the year-end cash balance and working-capital deficiency.
- Future capital calls, recoverability assumptions and potential dilution related to the Meadowlands investment.
- The realized impact of tax-law changes and the sustainability of quarterly dividends amid debt service and capital requirements.