ARK Restaurants Corp. — Form 10-Q Summary
Business context and period. The filing covers the 13 weeks ended December 30, 2017, the first fiscal quarter of 2018; the comparable period ended December 31, 2016. ARK operated 20 restaurants and bars, 19 fast-food concepts and catering operations, all in the United States, and reported as one segment. Unless noted, amounts below are in thousands.
Financial results and liquidity
- Revenue: $39,352, up 2.4% year over year. Food and beverage sales rose 1.7%; other revenue increased to $735 from $467. Company-wide same-store sales increased 2.2%.
- Operating results: Restaurant operating income was $882, down 33.8% from $1,333; its margin was approximately 2.2% of revenue versus 3.5%. Operating income was $882 versus $2,970, which included a $1,637 gain on the prior-year sale of the Rustic Inn, Jupiter property.
- Net income: Consolidated net income was $1,741 versus $2,085. Net income attributable to ARK was $1,627 versus $1,734; diluted EPS was $0.46 versus $0.49.
- Costs: Total costs and expenses grew 3.7%, faster than revenue. Food costs rose 4.9%, payroll 5.8%, occupancy 6.3%, and other operating costs 5.2%. Food, payroll and occupancy costs each increased as a share of revenue.
- Cash flow: Operating cash flow was $1,165, compared with $1,824. Investing activities used $2,516, primarily for fixed-asset purchases; financing activities provided $98. Cash fell $1,253 to $153.
- Balance sheet and debt: At December 30, total assets were $80,996 and total liabilities $37,797. Current assets were $8,557 versus current liabilities of $26,754; the company reported an $18,197 working-capital deficiency. Revolver borrowings were $8,498; notes payable were $11,689 gross, including $4,180 current. The revolver’s weighted-average rate was 5.0%.
- Dividends and equity: The board declared a $0.25-per-share quarterly dividend, payable January 3, 2018. The company stated it intended to continue quarterly dividends, subject to board discretion and financial conditions.
Changes, outlook and risks
- Revenue growth was outweighed by expense growth, reducing restaurant operating income. Regional same-store sales ranged from increases of 10.0% in Alabama and 8.3% in Washington, DC to declines of 13.2% in Boston and 4.0% in Atlantic City. Management cited local traffic, weather, Sequoia’s reopening and completion of road construction as factors.
- The Oyster House properties contributed approximately $2,388 of revenue and a $125 loss in the quarter. Management attributed higher food-cost ratios partly to these seafood operations, and payroll-cost pressure partly to minimum-wage increases.
- A provisional $1.2 million tax benefit related to the Tax Cuts and Jobs Act contributed to the quarter’s reported tax benefit of $1,078. The reported effective tax rate was approximately negative 162.5%; management expected the fiscal-year rate to be below the statutory rate, but said the final rate remained uncertain.
- Management said existing cash, banking facilities and operating cash flow should meet liquidity and capital-spending needs through at least February 13, 2019. It was negotiating increased facility availability and longer repayment periods, with refinancing expected in fiscal Q2 2018; completion was not assured in the filing.
- The company was not in compliance with the revolving facility’s fixed-charge coverage covenant at quarter-end. The lender issued a waiver on February 9, 2018 for that covenant as of December 30, 2017. The filing says the facility expires October 21, 2019 and is secured by company assets.
- Key risks include the working-capital deficit, seasonal demand and weather exposure, food-commodity price volatility, labor costs, competition and economic conditions. Management also noted substantial fixed costs. Ordinary-course legal claims were not expected to have a material adverse effect.
- Management reported no material changes to the previously disclosed risk factors and no material changes in internal control over financial reporting. No specific earnings or revenue guidance was provided.
Important facts for investors to verify
- Progress and terms of the proposed refinancing and increased credit availability, and ongoing covenant compliance after the waiver.
- Cash generation, capital spending and the company’s ability to address the working-capital deficiency while maintaining dividends.
- Whether restaurant-level margins recover as food, labor and occupancy costs rise, including performance of the Oyster House properties and weaker Boston and Atlantic City locations.
- The final tax effects of the tax-law changes and how much reported earnings benefited from the provisional, one-time tax adjustment.
- Collectability and concentration of receivables: two hotel operators represented 48% of accounts receivable at quarter-end.
- The cash-flow statement heading contains an apparent prior-year date inconsistency; confirm the comparative period against the filed financial statements. The statement’s columns and reported figures identify the periods as December 30, 2017 and December 31, 2016.