ARK Restaurants Corp. — Q3 FY2017 Form 10-Q
Reporting period: 13 and 39 weeks ended July 1, 2017; comparable periods ended July 2, 2016. Amounts are in millions of dollars unless otherwise stated. The company operated 20 restaurants and bars, 19 fast-food concepts, and catering operations in the United States.
Financial performance
| Metric | 13 weeks ended July 1, 2017 | Prior-year quarter | 39 weeks ended July 1, 2017 | Prior-year period |
|---|---|---|---|---|
| Total revenue | $41.201 | $41.233 | $114.071 | $112.496 |
| Restaurant operating income | $2.298 | $5.309 | $3.188 | $5.318 |
| Operating income | $2.298 | $5.309 | $4.825 | $5.318 |
| Net income attributable to ARK | $1.386 | $3.367 | $2.727 | $3.043 |
| Diluted earnings per share | $0.39 | $0.96 | $0.77 | $0.87 |
Q3 restaurant operating margin was approximately 5.6%, versus 12.9% a year earlier; the 39-week margin was 2.8%, versus 4.7%. Q3 same-store sales fell 7.9%. Food and beverage sales declined 1.0% for the quarter but increased 0.9% year to date; total revenue was nearly flat for the quarter and up 1.4% year to date.
For the 39 weeks, operating cash flow was $8.339 million, investing cash outflow was $12.569 million, and financing cash outflow was $2.689 million. Cash decreased from $7.239 million at October 1, 2016 to $0.320 million at July 1, 2017. Capital spending included $11.843 million of fixed-asset purchases.
At July 1, 2017, total assets were $78.779 million and total liabilities were $36.637 million. Current assets were $8.789 million against current liabilities of $24.019 million, a $15.230 million working-capital deficit. Debt included $13.094 million in bank notes before current maturities and financing costs, plus $3.887 million outstanding on the revolving facility. Notes payable included $4.040 million classified as current. The filing attributes the working-capital deterioration mainly to the Oyster House acquisition and Sequoia renovation spending.
Changes, drivers, and unusual items
- Q3 operating income fell $3.011 million year over year. Management cited $2.437 million of increased Sequoia losses while the Washington, DC restaurant was closed for renovation, and prior-year benefits from a $0.945 million commercial rent-tax liability reversal and a $0.261 million rent-liability correction. Oyster House properties contributed $0.527 million of operating income in the quarter.
- Same-store sales were especially weak in Washington, DC, down 65.9%, reflecting Sequoia’s closure. New York declined 2.2%; Atlantic City rose 13.7%; Florida rose 1.5%. Management also cited poor weather in New York and reduced traffic at Boston’s Faneuil Hall Marketplace.
- Q3 food and beverage costs rose to 27.2% of revenue from 25.8%; payroll rose to 33.4% from 31.3%; occupancy rose to 11.0% from 8.0%. Management linked higher food costs partly to the seafood-focused Oyster House properties, payroll to Sequoia pre-opening and training, and operating costs to fixed costs during the Sequoia closure and lower sales at some locations.
- For the 39 weeks, reported operating income included a $1.637 million gain on the sale of Rustic Inn, Jupiter. The restaurant operating income measure excludes this gain.
- The Oyster House properties were acquired in November 2016 for $10.750 million plus inventory, financed in part with an $8.0 million bank loan. The Sequoia renovation and reconcepting project was estimated at approximately $10 million; approximately $8.5 million had been incurred by July 1. Sequoia reopened in June 2017.
Liquidity, outlook, risks, and contingencies
- Management stated that cash balances, banking facilities, and operating cash flow should be sufficient for liquidity and capital spending needs for at least the next 12 months. The substantial working-capital deficit and low period-end cash balance remain important considerations.
- The company breached its fixed-charge-coverage covenant at July 1, 2017; the lender issued a waiver on August 11, 2017. The revolving facility was scheduled to expire October 21, 2017. Borrowings were secured by company assets and carried a reported weighted-average rate of 4.7% as of July 1.
- The board declared a $0.25-per-share quarterly dividend, paid July 5, 2017. The company said it intended to continue quarterly dividends, subject to board discretion and future earnings, cash flow, financial condition, capital needs, and other factors.
- No quantified revenue or earnings guidance was provided. Management highlighted seasonality, weather exposure, commodity-price volatility, labor costs, consumer preferences, competition, and economic conditions as risks. The company does not hedge commodity purchases with forward contracts.
- Ordinary-course accident, workers’ compensation, and employment-related claims were disclosed; management did not expect their resolution to materially affect results or financial position. No material changes to previously disclosed risk factors were reported.
- The Meadowlands investment remains subject to uncertainty around casino gaming approval and licensing. No impairment was recorded as of July 1, 2017, but the assessment depends on assumptions including gaming approval, revenues, costs, and capital spending.
Key facts for investors to verify
- Whether Sequoia’s reopening restores sales and improves profitability after the renovation-related losses and costs.
- Current cash, borrowing availability, and compliance with the fixed-charge-coverage covenant after the waiver and revolving-facility expiration date.
- Whether same-store sales and food, labor, and occupancy cost ratios improve, particularly in weak markets.
- Remaining Sequoia project costs and the operating contribution from the Oyster House properties.
- The sustainability of the quarterly dividend given the working-capital deficit, capital spending, and debt service.