ARK Restaurants Corp. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half ended March 30, 2019 (13 and 26 weeks, respectively). The company operated 19 restaurants and bars, 19 fast-food concepts, and catering operations in the United States.
Financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | 13 weeks ended Mar. 30, 2019 | 13 weeks ended Mar. 31, 2018 | 26 weeks ended Mar. 30, 2019 | 26 weeks ended Mar. 31, 2018 |
|---|---|---|---|---|
| Revenue | $35.31 | $35.28 | $75.86 | $74.63 |
| Operating income (loss) | $0.08 | $(0.56) | $0.38 | $0.32 |
| Net income (loss) attributable to ARK | $(0.67) | $(0.64) | $(0.73) | $0.99 |
| Basic EPS | $(0.19) | $(0.19) | $(0.21) | $0.29 |
| Operating cash flow | Not presented by quarter | $2.00 | $2.23 |
Quarterly revenue was nearly flat year over year; first-half revenue increased 1.6%. Second-quarter company-wide same-store food and beverage sales rose 0.9%. Operating margin was approximately 0.2% for the quarter and 0.5% year to date. Food and beverage costs were 27.7% of quarterly revenue and payroll was 36.8%; both were broadly consistent with the prior-year quarter.
Balance sheet, debt and liquidity
- At March 30, 2019, cash was $2.84 million, total assets $79.77 million, and total equity $41.25 million.
- Current assets of $10.07 million were below current liabilities of $15.57 million, a $5.51 million working-capital deficiency, compared with $4.63 million at September 29, 2018.
- Notes payable totaled $21.29 million, including $1.24 million current and $19.91 million long-term net of financing costs. The company had $7.22 million outstanding under its revolving facility; total borrowings were slightly higher than the $21.26 million at fiscal year-end.
- The revolving facility expires May 31, 2021. The company reported compliance with its financial covenants at quarter-end. Management believes cash, banking facilities and operating cash flow will cover liquidity and capital spending needs through at least May 15, 2020.
- First-half investing cash use was $1.51 million, primarily fixed-asset purchases. Financing cash use was $2.66 million, including $2.61 million of dividends, debt principal payments and distributions to non-controlling interests. Cash decreased $2.17 million from fiscal year-end.
Material changes and unusual items
- Durgin-Park closed January 12, 2019 after management concluded that reduced traffic and rising labor costs made it unprofitable. First-half closure-related charges were $1.106 million: $721,000 trademark impairment, $333,000 accelerated depreciation and $52,000 write-offs. The quarter included $39,000 of closure expense.
- First-half operating income rose to $384,000 from $320,000 despite the closure charges. Management cited strong first-quarter New York catering and stronger Florida and Alabama performance, partly offset by higher labor costs.
- First-half net loss contrasted with prior-year net income in part because income taxes shifted from a $1.223 million benefit in 2018 to a $446,000 provision in 2019. The 2019 provision included an approximately $450,000 charge related to settlement of a tax examination; the prior-year benefit included a one-time deferred-tax remeasurement.
- Regional second-quarter same-store sales were strongest in Florida (+7.0%) and Alabama (+6.6%); New York declined 6.4% and Las Vegas declined 1.0%. Management attributed the New York decline to weaker catering and competition, and the Las Vegas decline primarily to competition.
- On February 21, 2019, the company agreed to buy a Deerfield Beach, Florida restaurant and bar for $7.0 million, expected to close in fiscal Q3, subject to satisfactory lease arrangements and mortgage-holder consent. The company expected to finance the purchase with bank borrowings.
- The company declared quarterly dividends of $0.25 per share and stated its intention to continue them for the foreseeable future, subject to board discretion and financial conditions. Fiscal 2020 adoption of the lease accounting standard was expected to materially increase reported assets and liabilities.
Outlook, risks and contingencies
No earnings or revenue guidance was provided. Management noted seasonal softness in the first two fiscal quarters, substantial fixed costs, and possible weather effects on outdoor seating. Disclosed risks include economic and market conditions, restaurant sales, labor and food costs, weather, changing consumer preferences and competition. One hotel operator represented 22% of accounts receivable at quarter-end. The company reported ordinary-course legal and employment claims, which management did not expect to have a material adverse effect. Casino gaming at the Meadowlands, which could create a future food-and-beverage concession opportunity, remained uncertain.
Important facts for investors to verify
- Whether the company can address its working-capital deficit and fund the proposed $7.0 million acquisition while maintaining dividends and covenant compliance.
- Whether operating improvement persists after excluding the Durgin-Park closure charges, and whether labor-cost pressure and weaker New York sales continue.
- The availability and terms of revolving credit, including the facility’s borrowing limits, maturity and balloon payments on term notes.
- The timing and financing of the Deerfield Beach transaction, and the company’s lease obligations and expected balance-sheet effect of lease-standard adoption.
- Future tax expense and cash taxes following the tax-examination settlement; reported interim tax rates were affected by discrete items and may not indicate the full-year rate.
- The filing reports 3.477 million shares outstanding at March 30, 2019 and 3,498,844 shares at May 8, 2019; investors may wish to confirm the current share count.