ARK Restaurants Corp. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 28, 2013 (52 weeks), compared with the 52-week year ended September 29, 2012. The filing provides annual results, not standalone fourth-quarter figures.
Business context
ARK owned and operated 20 restaurants and bars, 22 fast-food concepts, and catering operations across the United States. It reports as one operating segment. Many locations are in casinos or destination venues, and results are seasonal, with the first and second fiscal quarters typically weaker.
Financial performance and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Total revenue | $130.598 million | $138.028 million | -5.4% |
| Operating income | $6.606 million | $9.991 million | -33.9% |
| Operating margin | 5.1% | 7.2% | -2.2 percentage points |
| Net income attributable to ARK | $3.825 million | $5.489 million | -30.3% |
| Diluted EPS | $1.13 | $1.65 | -31.5% |
| Cash provided by operations | $13.059 million | $13.423 million | -2.7% |
Food and beverage sales were $129.122 million, down 5.7%; other revenue rose 32.5% to $1.476 million. Food and beverage cost of sales was 25.1% of revenue, versus 25.5%; payroll was 32.5%, versus 31.4%; occupancy was 13.4%, versus 12.8%. Net income from continuing operations was $5.111 million, compared with $7.442 million. FY2012 also included a $292,000 net loss from discontinued operations.
Cash and cash equivalents were $8.748 million at year-end. Working capital surplus was $306,000, down from $4.061 million; current assets were $15.216 million and current liabilities $14.910 million. Notes payable totaled $3.657 million ($2.063 million current), compared with $2.125 million at FY2012 year-end. The bank note is secured by company assets, bears interest at LIBOR plus 3%, and includes financial covenants; ARK reported compliance at year-end. Operating cash flow was close to the prior year, while investing outflow increased to $10.380 million from $5.862 million. Financing outflow was $2.636 million, including dividends, debt principal payments, and non-controlling-interest distributions. Management said cash, operating cash flow, and available bank borrowings should meet liquidity and capital needs for at least 12 months.
Material changes and notable items
- Company-wide same-store food and beverage sales declined 3.0%. New York increased 7.8%, supported by catering; Las Vegas declined 3.6%, Washington, D.C. 10.7%, Atlantic City 11.7%, Connecticut 2.7%, and Florida 11.4%; Boston was nearly flat.
- Management attributed lower operating income to weaker Washington traffic and weather, greater competition in Las Vegas and Florida, lower casino complimentary usage in Florida, closures following Hurricane Sandy, professional fees related to Landry’s unsolicited bid, and approximately $100,000 of early losses at the new Atlantic City restaurant. Strong New York catering and improved performance at Clyde Frazier’s partially offset these pressures.
- Red and Sequoia in New York did not reopen after Hurricane Sandy flooding in October 2012; closure-related losses were $256,000. The company recorded no impairment charge in FY2013, compared with $379,000 in FY2012.
- ARK invested $4.2 million in New Meadowlands Racetrack LLC and entered a long-term food-and-beverage services agreement. It invested a further $464,000 after year-end, bringing ownership to 11.6%.
- After year-end, ARK agreed to acquire Rustic Inn Crab House in Dania Beach, Florida, for $7.5 million plus inventory, subject to due diligence, regulatory approval, and other closing conditions. The scheduled closing was on or before February 28, 2014.
- The company continued quarterly dividends of $0.25 per share. The board’s stated intention to continue dividends is discretionary and depends on earnings, cash flow, financial condition, capital needs, tax changes, and other factors.
Outlook, risks, and contingencies
The filing provides no quantified revenue or earnings guidance. Management noted that substantial same-store revenue growth is not typical for its restaurants and that expansion may be needed to replace revenue from closures or underperforming locations. New openings can entail significant construction, pre-opening costs, and early operating losses.
Principal risks include discretionary consumer spending and economic conditions; competition and changing customer preferences; food, beverage, labor, insurance, and healthcare costs; weather and seasonality; dependence on casino traffic at several locations; geographic concentration; and the ability to secure sites, financing, permits, and qualified staff. Leases create substantial fixed commitments: future minimum payments under noncancelable leases were $55.246 million, including $8.289 million due in FY2014. Legal matters included ordinary-course accident, workers’ compensation, and employment-discrimination claims; management did not expect them to materially affect the company. Tax positions remained subject to examination, with $162,000 of unrecognized tax benefits and approximately $96,000 of accrued interest and penalties disclosed.
The company reported effective disclosure controls and internal control over financial reporting. Its independent auditor gave an unqualified opinion on the consolidated financial statements; the auditor did not opine on internal-control effectiveness.
Most important facts for investors to verify
- Whether declining same-store sales and operating income persist, particularly in Washington, Atlantic City, Florida, and Las Vegas.
- Whether cash generation can support dividends, lease commitments, debt repayments, and planned investment while working capital remains limited.
- The status, final cost, funding, and operating contribution of the Rustic Inn acquisition and Meadowlands food-and-beverage agreement.
- Whether casino traffic, weather, labor and commodity costs, and competitive conditions materially affect future performance.
- Current debt balances, covenant headroom, lease obligations, and the board’s ongoing capacity and willingness to maintain quarterly dividends.