Business context and reporting period
Ark Restaurants Corp. filed this Form 10-K for the 52-week fiscal year ended October 1, 2016; the prior fiscal year ended October 3, 2015 and included 53 weeks. The company operated 21 restaurants and bars, 19 fast-food concepts and catering operations across the United States, reporting as one operating segment. Its properties include destination venues and restaurants in New York, Washington, Las Vegas, Atlantic City, Connecticut, Boston and Florida.
Financial performance and position
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | $150.2 million | $145.9 million | Up 2.9% |
| Operating income | $7.4 million | $8.9 million | Down 17.3% |
| Net income attributable to Ark | $4.0 million | $5.4 million | Down 25.2% |
| Diluted EPS | $1.15 | $1.54 | Down 25.3% |
| Operating cash flow | $7.6 million | $11.3 million | Down $3.7 million |
Calculated operating margin was approximately 4.9%, versus 6.1% in FY2015; calculated net margin attributable to Ark was approximately 2.7%, versus 3.7%. Company-wide same-store food and beverage sales fell 2.0%. Food and beverage costs were 26.3% of revenue, compared with 27.0%; payroll rose to 33.8% from 32.2%, with management citing labor-law changes and payroll at the Jupiter property without a corresponding sales increase.
Cash and cash equivalents were $7.2 million at year-end, down from $9.7 million. Working capital was a $658,000 deficit, compared with $129,000 positive a year earlier. Net cash used in investing was $3.0 million and net cash used in financing was $7.1 million. Notes payable totaled $7.991 million before deferred financing costs, including $2.617 million current; the company reported no borrowing under its revolving facility at year-end. Management said cash balances and operating cash flow should meet liquidity and capital-spending needs for at least 12 months. The company paid $1.00 per share in dividends during FY2016 and stated an intention to continue quarterly dividends, subject to the board’s discretion.
Material changes versus the prior period
- Revenue growth reflected the Shuckers acquisition and the Bryant Park Southwest Porch, partly offset by lower same-store sales and closures. Shuckers contributed approximately $4.8 million in revenue and $523,000 in operating income after its October 2015 acquisition.
- Profitability declined as operating costs increased faster than revenue. Operating income was also affected by a $509,000 decline at The Rustic Inn in Dania Beach amid municipal road construction, closures of V Bar and Center Café, and higher payroll. Offsetting items included Shuckers and Southwest Porch operating income and a $1.101 million reversal of commercial rent tax accruals.
- Same-store sales varied materially by market: Florida declined 8.6%, Boston 8.1%, and Atlantic City increased 5.5%. Management attributed Florida weakness in part to Dania Beach road construction and competition, and Boston weakness to winter weather.
- The company acquired Shuckers in Jensen Beach for approximately $5.7 million, funded with a $5.0 million bank loan and cash. It also retired 1.356 million treasury shares during FY2016; outstanding shares were 3.423 million at year-end.
Outlook, risks, contingencies and unusual items
- The filing provides no specific revenue or earnings guidance. Management described possible expansion as dependent on favorable opportunities, financing availability and other factors, and noted that new restaurants can incur start-up costs and early operating losses.
- Key operating risks include consumer discretionary spending, competition, food and supply costs, labor availability and wage increases, adverse weather, seasonality, and dependence on casino and destination traffic. Winter is typically the weakest period; outdoor seating makes warmer-quarter sales vulnerable to poor weather.
- In November 2016, voters rejected a referendum on casino gaming in Northern New Jersey; state law bars another vote for at least two years. Ark expected to fund its share of an anticipated $3 million New Meadowlands Racetrack capital call in January 2017 to avoid dilution. The company reported a $4.886 million investment and $1.7 million in loans to Meadowlands Newmark; no impairment was recorded, but recoverability depends in part on uncertain gaming approval and licensing.
- Subsequent to year-end, the company acquired two Alabama restaurants and related real estate for $10.75 million, financed with an $8.0 million bank loan and cash. It also entered a transaction to acquire the Jupiter Rustic Inn property for approximately $5.2 million and sell it for $8.25 million, with a temporary lease ending April 30, 2017, when it expected to vacate. These post-year-end transactions were not part of FY2016 results.
- Future minimum operating lease payments were $85.2 million, including $10.1 million due in FY2017. Ordinary-course accident, workers’ compensation and employment-related litigation was disclosed; management did not expect a material adverse effect. The company reported compliance with its debt covenants.
- The filing identifies an immaterial prior-period rent-liability overstatement of $261,000, corrected in FY2016, and reports no impairment charges for long-lived assets or goodwill and trademarks. The commercial rent tax accrual reversal and a $157,000 related refund reduced occupancy expense.
Important facts for investors to verify
- Whether same-store sales and margins recover, particularly in Florida, Boston and Las Vegas, and how long Dania Beach road construction affects performance.
- Liquidity and financing after the $10.75 million Alabama acquisition, including debt maturities, revolving-facility terms and the effect of planned capital spending and dividends.
- The economics and accounting treatment of the Jupiter property purchase, resale and temporary lease, and the expected impact of vacating the site.
- Funding requirements and potential impairment risk for the Meadowlands investment following the referendum defeat and expected capital call.
- Whether the $1.101 million tax-liability reversal and other unusual items make reported occupancy costs and operating results less representative of ongoing performance.