ARK Restaurants Corp. — FY2012 Form 10-K
Business context and reporting period. The filing covers the 52-week fiscal year ended September 29, 2012, compared with the 52-week year ended October 1, 2011. ARK owned and/or operated restaurants, bars, fast-food concepts and catering operations across several U.S. markets; it reports one operating segment. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue | $138.0 million | $136.9 million |
| Operating income | $10.0 million | $5.8 million |
| Operating margin | 7.2% | 4.2% |
| Income from continuing operations | $7.4 million | $4.8 million |
| Net income attributable to ARK | $5.5 million | $1.4 million |
| Diluted EPS | $1.65 | $0.40 |
| Cash provided by operating activities | $13.4 million | $8.5 million |
- Food and beverage sales rose 0.6%; other revenue was $1.1 million. Company-wide same-store food and beverage sales increased 4.8%.
- Food and beverage costs declined to 25.5% of revenue from 26.8%; payroll declined to 31.4% from 32.6%.
- Cash and cash equivalents were $8.7 million at year-end, and working capital was a $4.1 million surplus. Current assets were $16.5 million versus current liabilities of $12.5 million.
- Notes payable totaled $2.1 million: $885,000 current and $1.24 million long-term. The note arose from a $3.125 million share repurchase; $1.0 million was paid in cash and $2.125 million financed by an unsecured note. Operating lease commitments were $66.9 million as disclosed in the filing.
- Investing activities used $5.9 million, including $8.0 million of fixed-asset purchases, partly offset by investment-security sales. Financing activities used $6.6 million, including $3.2 million of dividends, $2.3 million of distributions to non-controlling interests and $1.0 million cash paid for treasury shares.
Changes versus prior year and notable items
- Operating income increased 73.5%, while total revenue grew 0.8%. Management attributed the earnings improvement mainly to stronger New York and Washington, D.C. results, favorable weather and early spring, improving conditions in other markets, and better menu costing.
- Same-store sales gains were strongest in Atlantic City (+21.2%), Washington, D.C. (+19.4%) and New York (+9.0%). Boston declined 11.3%, with the location affected by a fire; Connecticut fell 3.4%. Las Vegas rose 1.1%, while Florida was nearly flat.
- The new Clyde Frazier’s Wine and Dine generated approximately $1.8 million of pre-opening and operating losses. The company also recorded a $379,000 impairment charge, $365,000 of closure-related losses, and a $270,000 disposal loss and $155,000 operating loss in discontinued operations. Discontinued-operations losses totaled $292,000, compared with $2.5 million in FY2011.
- Income tax expense rose to $3.0 million from $1.5 million. The reported deferred tax asset declined to $5.0 million from $7.3 million.
Outlook, risks and contingencies
- Management said cash balances, investments and operating cash flow should fund liquidity and capital spending requirements for at least the next 12 months. It intended to continue quarterly dividends of $0.25 per share, subject to Board discretion and future financial conditions. No earnings or revenue guidance was provided.
- On October 29, 2012, hurricane-related flooding damaged the Red and Sequoia properties in New York. ARK did not expect them to reopen because their leases were due to expire in the second quarter of FY2013; management expected uninsured losses not to materially affect financial position, results or cash flows.
- After year-end, ARK agreed to design and lease a restaurant at the Tropicana in Atlantic City, with an anticipated FY2013 third-quarter opening. It also acquired an additional 14.39% interest in its Tampa/Hollywood partnership for $2.965 million, bringing its ownership to 64.39%.
- Key risks include discretionary consumer spending and economic conditions, competition, food and labor cost inflation, minimum-wage and healthcare requirements, weather and seasonality, dependence on casino partners, geographic concentration, restaurant-opening execution, and licensing and litigation exposure. Many leases include fixed costs and some also include sales-based rent.
- Ordinary-course accident, workers’ compensation and employment-related lawsuits were disclosed; management did not expect them to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether the FY2012 operating improvement and same-store sales growth persist after accounting for favorable weather and the prior-year Washington flood comparison.
- The operational, insurance and financial outcomes of the Red and Sequoia closures, including any costs not covered by insurance.
- Cash requirements for the note payable, restaurant investment, lease commitments, and the post-year-end $2.965 million partnership-interest purchase.
- Whether new and planned operations, including Clyde Frazier’s, Basketball City and the Tropicana restaurant, meet management’s expectations and support the dividend.
- The durability of tax benefits and deferred tax assets, given the higher FY2012 tax provision and the company’s stated limits on using some subsidiary tax losses.