ARK RESTAURANTS CORP annual report, FY2021

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ARK Restaurants Corp. — FY2021 Form 10-K

Reporting period: Fiscal year ended October 2, 2021 (52 weeks), compared with the 53-week fiscal year ended October 3, 2020. The company operated restaurants, bars, fast-food concepts and catering businesses across the U.S. All restaurants had resumed indoor dining without restrictions by fiscal year-end.

Financial performance

  • Revenue: $131.9 million, up 23.8% from $106.5 million. Food and beverage sales were $129.0 million; other revenue was $2.9 million.
  • Same-store food and beverage sales: Up 25.4% year over year. Florida rose 36.3%, Alabama 34.2% and Las Vegas 24.0%; New York fell 5.8% and Connecticut fell 55.3%. Management attributed the overall increase mainly to reopening and increased customer traffic versus the pandemic-affected prior year, along with menu price increases.
  • Operating income: $6.2 million, versus an operating loss of $7.8 million. Operating margin was approximately 4.7%, compared with approximately negative 7.3%.
  • Net income attributable to Ark: $12.9 million, or $3.67 per basic share, compared with a net loss of $4.7 million, or $1.34 per share. Results included a $10.4 million gain from PPP loan forgiveness; reported net income therefore substantially exceeded operating income.
  • Costs and margins: Food and beverage costs increased to 29.5% of revenue from 26.8%, mainly due to higher seafood, crab, chicken and beef prices. Payroll declined to 32.3% of revenue from 38.5%; occupancy declined to 11.2% from 14.5%, partly reflecting $0.8 million of finalized rent concessions.
  • Cash flow: Operating activities provided $9.3 million, versus $4.5 million used in the prior year. Investing activities used $3.5 million, including the Blue Moon Fish Company acquisition; fixed-asset purchases were $2.1 million. Financing activities used $3.6 million.
  • Liquidity: Cash was $19.2 million. Working capital was positive $2.6 million, compared with a $3.2 million deficit a year earlier.
  • Debt and leases: Notes payable totaled $32.6 million, including $27.0 million owed to the bank and $4.7 million of remaining PPP loans. Operating lease liabilities totaled $58.7 million. The company reported compliance with debt covenants at year-end.

Material changes and unusual items

  • Performance rebounded as restaurants operated with fewer or no capacity restrictions; the prior year included mandated closures, restricted capacity and an estimated $3.15 million of direct COVID-related costs.
  • Blue Moon Fish Company was acquired in December 2020 for $2.82 million, funded with $1.82 million cash and a $1.0 million seller note. It contributed $5.9 million in revenue and $1.0 million in net income during the reported period.
  • The company recorded an $0.81 million gain on terminating the Clyde Frazier’s Wine and Dine lease. It also closed Gallagher’s Steakhouse and Gallagher’s Burger Bar in Atlantic City and decided not to reopen Thunder Grill in Washington, D.C.
  • In July 2021, $9.7 million of revolving-credit borrowings were converted to a term note. The bank debt bears interest at LIBOR plus 3.5%; the company expected to work with its lender on a replacement benchmark as LIBOR was discontinued.
  • Of the PPP loans, $10.4 million was forgiven during the year. Forgiveness of the remaining $4.7 million was uncertain at year-end; $2.0 million was classified as current.

Outlook, risks and contingencies

  • Management said existing cash and banking facilities should be sufficient for operating and capital needs for at least the next 12 months. No specific revenue or earnings guidance was provided. The company did not expect to resume quarterly cash dividends in the foreseeable future.
  • COVID-related uncertainty, labor shortages and wage inflation, supply-chain disruption, food-cost volatility, consumer demand, weather and competition remain risks. The business is seasonal, with outdoor-focused locations particularly exposed to weather.
  • The New York-New York Hotel and Casino leases in Las Vegas were scheduled to expire in January 2023; negotiations for extensions were underway. Failure to reach agreements could materially harm results and cash flow.
  • Debt agreements include financial covenants, and modified covenants were in effect through fiscal Q2 2022. The company reported compliance at October 2, 2021.
  • A New York wage-and-hour class action settlement received preliminary court approval for approximately the amount already accrued; final approval was still anticipated. Management did not expect ordinary-course claims to have a material adverse effect.

Important facts for investors to verify

  • How much of the $12.9 million reported net income reflects the one-time $10.4 million PPP forgiveness gain, and how operating performance trends after reopening.
  • Whether the remaining PPP balance was forgiven or repaid, and the company’s subsequent debt maturities and covenant position.
  • Progress and terms of the Las Vegas lease renewals ahead of the 2023 expiration.
  • Whether same-store sales recovery continues, particularly in New York and at Foxwoods, and whether food, labor and supply costs constrain margins.
  • Collection of the $3.8 million of prepaid and refundable income taxes related to carryback claims, and any changes in impairment risks for restaurant assets or the Meadowlands investment.