ARK Restaurants Corp. — Q2 FY2015 Form 10-Q
Reporting period: 13 weeks ended March 28, 2015; year-to-date figures cover 26 weeks. Comparisons are with the 13 and 26 weeks ended March 29, 2014. Amounts are in thousands of dollars except per-share data.
Business context
ARK operated 21 restaurants and bars, 19 fast-food concepts, and catering operations in the United States, reported as one segment. The company’s winter quarters are typically seasonally weaker. The quarter included the January 2015 opening of its Jupiter, Florida restaurant; four Las Vegas locations had closed following lease expirations.
Financial performance
| Metric | 13 weeks ended Mar. 28, 2015 | 13 weeks ended Mar. 29, 2014 | 26 weeks ended Mar. 28, 2015 | 26 weeks ended Mar. 29, 2014 |
|---|---|---|---|---|
| Total revenue | $31,548 | $31,037 | $64,906 | $63,176 |
| Operating income (loss) | $(634) | $149 | $585 | $1,351 |
| Consolidated net income (loss) | $(442) | $150 | $436 | $1,006 |
| Net income (loss) attributable to ARK | $(583) | $(174) | $140 | $389 |
| Basic earnings (loss) per share | $(0.17) | $(0.05) | $0.04 | $0.12 |
| Operating margin | -2.0% | 0.5% | 0.9% | 2.1% |
Quarterly revenue rose 1.6%, but costs and expenses increased 4.2%, producing an operating loss. For the half year, revenue increased 2.7%, while costs and expenses rose 4.0%; operating income declined 56.7%. Same-store food and beverage sales fell 6.1% in Q2. Food and beverage costs rose to 29.1% of quarterly revenue from 27.0%, and payroll rose to 35.8% from 34.0%; management attributed cost pressure in part to seafood operations and Jupiter opening costs.
Quarterly drivers included approximately $498 of pre-opening and early operating losses at Jupiter, increased competition and reduced casino complimentary usage at Florida properties, and the impact of the Las Vegas closures. Dania Beach’s Rustic Inn and improved performance at Clyde Frazier’s Wine and Dine partly offset these pressures. Management reported Dania Beach Rustic Inn revenue of approximately $4,608 and earnings of approximately $1,133 for the quarter.
Cash flow, debt and liquidity
- Cash and cash equivalents were $6,203 at March 28, down $2,459 from $8,662 at September 27, 2014.
- For the first 26 weeks, operating cash flow was $1,488, versus $3,445 a year earlier. Investing used $1,103, including fixed-asset purchases and Jupiter improvements; financing used $2,844, including dividends, debt principal payments, and distributions to non-controlling interests.
- Total notes payable were $6,332 ($1,617 current and $4,715 long-term), down from $7,318 at fiscal year-end. The company reported compliance with all debt covenants.
- Working capital was negative $2,565, compared with a $1,303 deficiency at September 27, 2014. Management said cash balances and operating cash flow should cover liquidity and capital spending requirements for at least the next 12 months.
- The board declared a quarterly dividend of $0.25 per share, payable April 2, 2015. Management intended to continue quarterly dividends, subject to board discretion and financial conditions.
Outlook, risks and notable items
- No quantified revenue or earnings guidance was provided. Management expects the full-year effective tax rate to be below the statutory rate, citing tax credits, lower-tax jurisdictions, and income attributable to non-controlling interests; the final rate remains uncertain.
- Key disclosed risks include economic and market conditions, restaurant sales, labor and food costs, competition, consumer preferences, adverse weather, and seasonality. Commodity prices can be volatile; the company does not use forward commodity contracts.
- The company corrected an immaterial gift-card-liability error involving a prior overstatement of $224 ($161 net of tax, or $0.05 per share). It concluded the error was immaterial to prior-period financial statements; the March 28 statements reflect the correction.
- Ordinary-course lawsuits include accident, workers’ compensation, and employment-related matters. Management did not expect their resolution to materially affect financial position, results, or cash flows.
- Management reported effective disclosure controls as of March 28, 2015, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track same-store sales and Florida performance, including the effect of casino complimentary usage and competition.
- Assess whether Jupiter’s opening losses moderate and whether the new location delivers sustained returns.
- Review food-cost and labor-cost trends against revenue growth and operating-margin recovery.
- Monitor operating cash generation, the working-capital deficit, debt repayment, covenant compliance, and the sustainability of quarterly dividends.
- Confirm the financial-statement treatment and period impact of the gift-card-liability correction in the accompanying notes and subsequent filings.