ARK RESTAURANTS CORP quarterly report, Q1 FY2017

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ARK Restaurants Corp. — Q1 FY2017 Form 10-Q

Reporting period: 13 weeks ended December 31, 2016; comparative period ended January 2, 2016. Amounts below are in millions unless noted. ARK operated 22 restaurants and bars, 19 fast-food concepts, and catering operations in the United States.

Financial performance

  • Revenue: $38.392, up 3.8% from $36.991. Food and beverage sales rose 3.6% to $37.953. Company-wide same-store food and beverage sales increased 2.7%.
  • Costs and margins: Total costs and expenses were $37.087, up 2.0%. Restaurant operating income was $1.305 versus $0.633; the corresponding margin increased to about 3.4% from 1.7%. Food cost was 25.4% of revenue versus 25.9%, and payroll was 33.7% versus 35.7%.
  • Operating and net income: Operating income was $2.942 versus $0.633, including a $1.637 gain on the Rustic Inn, Jupiter property sale. Net income attributable to ARK was $1.734 versus $0.321; diluted EPS was $0.49 versus $0.09. The gain materially contributed to the year-over-year increase.
  • Cash flow: Operating cash flow was $1.824, compared with $0.961 used in operations a year earlier. Investing used $2.260, including Oyster House acquisition costs and capital spending, partly offset by Rustic Inn sale proceeds. Financing used $2.141, including dividends, debt principal payments, and distributions to non-controlling interests. Cash declined $2.577 to $4.662.
  • Liquidity and debt: Current assets were $13.225 and current liabilities $17.659, a working-capital deficit of $4.434, versus a $0.658 deficit at October 1, 2016. Notes payable totaled $15.336 gross, including $4.216 current; long-term notes payable, net of financing costs, were $11.071. The company reported compliance with debt covenants at quarter-end.
  • Other balance-sheet items: Total assets were $75.168 and total equity $42.914 at December 31, 2016.

Material changes and unusual items

  • ARK acquired the Original Oyster House properties in Alabama on November 30, 2016 for $10.750 plus approximately $0.293 of inventory. The purchase was financed with an $8.000 bank note and cash. The quarter included approximately $1.680 of revenue and a $0.054 loss from Shuckers and Oyster House properties combined.
  • Same-store sales varied by market: Atlantic City +10.5%, Washington, D.C. +7.6%, Las Vegas +6.5%, New York +5.5%, Boston -8.0%, and Florida -8.7%. Management cited traffic declines and road construction affecting Rustic Inn in Dania Beach, plus increased competition at a Florida food-court property.
  • ARK recognized a $1.637 gain related to the Rustic Inn, Jupiter real estate transaction. It expected to vacate the property by April 30, 2017 under a temporary lease arrangement. The filing describes an $8.250 sale price following exercise of a right of first refusal on a purchase price of approximately $5.200.
  • Depreciation and amortization increased $0.345 year over year. Management attributed approximately $0.358 of additional expense to asset write-offs associated with Sequoia’s renovation and the pending Canyon Road lease transfer.
  • The Sequoia restaurant closed January 4, 2017 for renovation and was expected to reopen in May 2017. Estimated renovation costs were $6–$7 million. A $0.283 fixed-asset disposal loss was included in the quarter; the Sequoia lease runs through November 2032, with annual rent of approximately $1.2 million increasing over time.

Outlook, risks, and contingencies

  • Management stated that existing cash and cash generated from operations should meet liquidity and capital spending needs for at least the next 12 months, despite the working-capital deficit.
  • The company intended to continue quarterly cash dividends of $0.25 per share, subject to board discretion and future earnings, cash flow, financial condition, capital needs, and other factors. The quarter’s dividend payment totaled $0.856.
  • Management expects the current fiscal-year effective tax rate to be significantly below the statutory rate, citing FICA tax credits and income attributable to non-controlling interests; the final rate remains uncertain.
  • Key stated risks include economic and market conditions, restaurant sales, labor and food costs, weather, consumer preferences, and competition. The company also highlighted seasonality and commodity-price volatility; it does not use forward commodity contracts.
  • ARK’s NMR investment faces uncertainty following defeat of the New Jersey casino-gaming referendum; state law bars another ballot vote for two years. Management reported no impairment at December 31, 2016. A further $0.222 capital contribution was made February 7, 2017.
  • Ordinary-course legal claims were not expected by management to have a material adverse effect. No material changes to previously disclosed risk factors were reported. A share repurchase plan authorized up to 500,000 shares, but no shares were repurchased during the quarter.

Important facts for investors to verify

  • How much of the reported earnings improvement reflects ongoing restaurant operations versus the $1.637 property-sale gain and other unusual charges?
  • Whether the Oyster House acquisition, its contribution to sales and earnings, and the related $8.000 borrowing perform as expected.
  • Whether cash generation can fund Sequoia’s estimated $6–$7 million renovation, dividends, debt service, and other capital needs while working capital remains negative.
  • Progress on the Sequoia reopening and Canyon Road lease transfer, and the timing and terms of the Rustic Inn, Jupiter vacatur.
  • Developments in Florida same-store sales, the Dania Beach road construction impact, and the NMR investment’s recoverability.
  • Current availability and terms under the revolving facility, which the filing says expires October 21, 2017; the text does not provide a clear December 31, 2016 outstanding balance for that facility.