Ark Restaurants Corp Q1 FY2022 Earnings Call

Greetings, and welcome to the Ark Restaurants First Quarter 2022 Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chris Lowe, Secretary for Ark Restaurants. Thank you. You may begin.

Thank you, operator. Good morning, and thank you for joining us on our conference call for the first quarter ended January 1, 2022. My name is Christopher Lowe, and I am the Secretary of Ark Restaurants. With me on the call today is Michael Weinstein, our Chairman and CEO; Anthony Sirica, our Chief Financial Officer; and Vinny Pascal, our Chief Operating Officer. For those of you who have not yet obtained a copy of our press release, it was issued over the newswires yesterday and is available on our website. To review the full text of that press release, along with the associated financial tables, please go to our homepage at www.arkrestaurants.com. Before we begin, however, I'd like to read the Safe Harbor statement. I need to remind everyone that part of our discussion this morning will include forward-looking statements and that these statements are not guarantees of future performance. And therefore, undue reliance should not be placed on them. We refer everyone to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on our operating results, performance and financial condition. I'll now turn the call over to Michael.

Hi, everybody. I'm going to turn the call over to Anthony just to give you an overview of where we stand in terms of our balance sheet. So Anthony, do you want to take that?

Yes. We had a really strong quarter, as you've seen in the press release, as Michael will discuss. As of the end of the quarter, we had approximately $20 million of cash. Our debt was approximately $31 million. Of that, $4 million is still outstanding PPP loans, of which we expect $3 million to be forgiven within the next 2 to 3 months. So the balance of that, the $1 million would be repaid over 10 months. We expect our cash based on our current thinking to grow, continue to grow through year-end, as we hit the spring and summer months, which we expect to be very strong based on our projections. Our balance sheet is really strong, and we think it will get stronger as the months progress. We still have a $2.5 million receivable on the books for our tax refunds, and we will be applying for additional refunds once we receive those. The IRS has been substantially backed up. You have to deal with the carrybacks that they allowed as part of the CARES Act allowing us to go back 5 years. I think we've discussed these before, but we have not received those funds yet from the IRS, but we are actually working with the tax advocates' office to obtain those refunds. I'll turn it back to Michael.

So, hi, everybody. Belated Valentine's Day greetings. So the quarter was strong, but within the quarter, within our venues, not everything was strong. We were particularly strong in Florida and Las Vegas. Alabama was normal, with no bump up in revenues from prior years, just the usual. Florida was particularly rewarding. In New York, we were still dealing with Omicron and the hesitancy for people to eat indoors, leading to a lack of event participation in the restaurants. A lot of events were still canceled or postponed to future periods. So New York remained weak, and Sequoia in Washington, D.C. experienced similar issues. Given the rest of the country and the weakness in New York, the final results were very satisfying. However, if we can get New York back to where it used to be, I think you will see some very strong results from the company. We're still dealing with real cost problems. As I have been in touch with all our managers, we're not just raising prices because we think we can, since everybody else seems to be doing it and customers could be accepting it. What we've been looking at is, what is your customer makeup? So, for instance, at a Blue Moon in Florida, that's a very high-end restaurant, with entrees priced from the high $30s to low $40s. There, we've been able to raise prices because there's no customer backlash. They seem to be well-heeled and accepting of the increases, understanding the environment. But when you get to JB's or Rustic, we have a very mixed demographic. And you just can't raise prices as aggressively because a portion of your customer base cannot afford the increases. So there, we have to be more cautious. Some of our restaurants are benefiting from people's knowledge of inflationary pressures, but some of them cannot take full advantage of that. As a result, the price increases have been more modest than one would expect, especially given the publicity about restaurant prices. We're also very concerned about the future in terms of as things normalize—cross our fingers, we hope they do. When there are other entertainment opportunities for disposable income, will people suddenly look at restaurant prices and think, 'This is crazy?' Because, honestly, they are crazy in many instances. So we're increasing prices modestly. We have labor problems everywhere; we can't find people. Our labor costs are going up significantly, well beyond minimum wage for certain functions that used to be minimum wage. For example, in New York, we used to pay hostesses around $16 to $17 an hour, but now we can't find them at $24 to $25 an hour. The total payroll amount in the individual restaurants has not moved that much despite these increases because we have unfilled jobs. In Vegas, for instance, we're short 50 people, and New York remains similarly affected. We just can't find people. The people we find, if we find them at all, are not trained to the extent we would like them to be trained. They may work for 2 or 3 weeks and then leave. It's very, very hard to find competent people. However, our total payrolls are not terrible. We're paying a lot of overtime because we can't staff all our shifts unless we pay overtime. For instance, in Robert in New York, we're only open 6 days a week because we can't find enough people to open on the seventh day. Our back-of-the-house kitchen employees are all working 6 days, and they’re all being paid overtime. So what I'm trying to convey is the framework of how strong our business was, given even the weakness in New York and the inflationary pressures we're facing on food costs and labor costs. Our hope is that, at some point, we will see some normalization of food prices. They're not going up anymore, by the way. For us, they're pretty much stable or, in some cases, coming down a little bit, but they're still much higher than they were 2 years ago. I don't believe labor costs will decrease. However, I do think as people return to the job market, we will not be paying these excessive overtime fees. Consequently, I anticipate that our margins will expand, leading to better financial results. Meadowlands, which we own on a fully diluted basis, has performed somewhere close to 8%. Sports betting has been very helpful. We received a distribution this year, a small distribution, basically equivalent to what our tax bill will be for our share of the K-1 earnings. Our share was approximately $1 million this year, of which we received $200,000 as distribution, while the rest will go towards paying down debt. New York State just started sports betting, Internet betting. That is certainly having some impact, but not as much as we had anticipated. The Meadowlands remains one of the stronger sports betting venues in the United States. New York State is now pushing forward to grant casino licenses downstate. That means Yonkers, Long Island, and Queens. If they proceed, we believe that will be a significant impetus for Jersey to revisit establishing a casino in the north. As I’ve said in the past, our facility at the Meadowlands is already set up to house a casino—the first phase of the casino. All the environmental licenses are in place. There is no residential town surrounding us that would oppose us, so we consider ourselves a very likely candidate if New Jersey moves forward. Not much else to report; things are similar to what we were doing last year in these various quarters. The only other thing I should mention is our Vegas leases, as most of you know, are set to expire in January 2023. We've been in lease negotiations with MGM for our various leases at New York, New York. That is going very, very well. I think we are essentially on the same page, but nothing has been signed yet. However, I believe those extensions are likely. Now, I'll open up the floor for questions.

Our first question comes from Paul Johnson, a private investor.

Congrats on the great results. Just wanted to ask about the balance sheet. So first of all, in an environment of rising interest rates, how much will that affect our interest expense? Or how much of the debt is fixed at this point?

We're working on switching off of LIBOR with the bank. So it could be—they are pegged to—we have an alternate rate pegged to prime. I think interest will probably go up maybe $100,000 to $200,000 a year.

Okay. So there is an opportunity to refinance some of that debt or to lock it in?

We're talking to the bank, but I don't think we'll be refinancing anything in the near future.

Okay. And then along those lines, given the outlook, is there a possibility of eventually reinstating the dividend?

Let me answer that question. So obviously, we have, for a company of our size and given the history of the company, we have a lot of cash available to us now, and that's growing. So we historically have paid a dividend. There have been a couple of times when we interrupted that: one was in 2008 and then again during the pandemic. It's in the company's interest to reward shareholders with a dividend when excess cash is available. So I think it's a little premature to start looking at that. We're still concerned about the pandemic. If there's another variant, what that might do to our business; that may be overly cautious, but we've been through a lot here, especially in New York City. So the answer is yes, we do have discussions about it. We have not made any decision on when to pull the trigger on that. There's also a little bit of clarity—we would like to see these Las Vegas leases signed. We think that's going to happen in the next couple of months. However, if those leases are not signed, that would change our perspective on what cash needs we have. The third factor is—while this may be unconventional thinking on my part—we've had success buying restaurants that have the land underneath them as part of the deal. If you look at when we bought Rustic, I'm repeating this for those who might not be aware, we paid $7.5 million for a restaurant. At the time, it was making $1.5 million a year, so 5x, but it came with the land, which was appraised at $4 million. We looked at that deal and concluded we had to go through it, and if you, at that moment, wanted to do a sale leaseback and give somebody $1 million without an Ark guarantee in rent, you could probably get $10 million for the restaurant while paying $1 million in rent. Therefore, you would pocket $2.5 million, while still maintaining $500,000 a year in cash flow. We've done four of these deals, including another deal with JB's. We've partnered on several projects. However, those deals essentially dried up, especially in the South, which is our focus. When the pandemic restrictions were removed in Florida, everybody rushed to restaurants. Volumes were higher than anyone expected, and those who received PPP money to sustain themselves were suddenly doing land-office business. These deals were no longer available to us, even though we were in search of them. What's interesting to me is I think those deals are now available again as we move further away from the pandemic, because those restaurant owners who were previously hesitant are now reconsidering. After the last month, we've seen 3 or 4 deals that are intriguing, and we’re investigating them. This all ties back to the dividend. To summarize, it has historically been in our interest to pay a dividend, and I think that is likely at some point.

That's all really helpful. And I guess we hadn't realized that those kinds of deals in Florida could become available again, because if they do, to be able to do another Rustic Inn deal at those kinds of multiples or JB's would be the first choice for sure, over a dividend or buyback from our point of view.

We agree.

Our next question comes from the line of Roger Lipton with Lipton Financial Services.

Good summary, Mike, as usual. I was going to ask about the dividend, but that's been covered. Just one quick question. You said you may have some further tax receivable that you can apply for once you receive this initial one. Roughly, what kind of money is that?

About $1 million to $1.5 million, we believe.

Our next question comes from the line of Jason Walters, private investor.

Two quick questions. The first on the balance sheet. At the last call in December, I believe there was $24 million in cash and $25.8 million in debt. And I think you said, Anthony, that now we're looking at $20 million in cash and $30 million in debt. I was wondering if you could just provide a little bit of color on that change. And then secondly, Michael, you mentioned the real estate. I was wondering if you might just have an estimate of the total value of the company's real estate holdings.

Well, I think the difference in the cash numbers today is due to the adjustment after float. I think the previous number was probably before float because when you look at the balance sheet, the cash is essentially the same. It was 19.1 at year-end, and it's 20.1 at the end of the quarter on the balance sheet. So I think maybe last quarter I might have referenced cash on hand rather than after float.

I think that was my fault. I'll interrupt Anthony. Anthony doesn't make those mistakes. I think I talked about float. And regarding the debt, I'm sorry, you mentioned—what was your question on the debt? $25 million?

Yes.

And now it's $30 million, but that's total debt. Last quarter—I said it was $25 million of debt?

Long term.

Oh, the long-term debt, yes. Well, I'm talking about the total debt today. So the long-term is now 23.8, and last quarter it was 25.5. Those changes reflect the principal payments that we made, our bank debt we paid quarterly on December 1. Additionally, we've made some principal payments on the notes to the seller of Blue Moon, and we repaid about $500,000 or $600,000 of PPP loans that were not forgiven. Does that answer your question?

Yes. Thank you. And then the second question was just about what the approximate value of the company's real estate.

So the value of the real estate could be evaluated based only on the restaurants that occupy that real estate. That's a function of interest rates on a sale leaseback. I believe that’s the way to interpret it. So we think that without a guarantee, that real estate yields about a 7 cap currently. With a guarantee, we could get more, and if we syndicate the deals, we would earn significantly more. I really haven't explored what much more could be because I'm not interested in selling the real estate. However, if you look at Rustic again, and if you offered, 'Hey, I'm prepared to give up $1 million of cash flow for rent,' in this interest rate environment, with an Ark guarantee, we feel very, very comfortable guaranteeing that transaction. I still think you could obtain around $10 million. If interest rates increase, maybe slightly less. Without an Ark guarantee, you're probably looking at $7.5 million to $8 million. If I syndicated with groups such as those that got excellent returns, they would be interested in those deals and might aim for an 8% return.

So I would estimate conservatively that the real estate value of the properties we own, which include the 2 Alabama properties, Rustic, and Shuckers, is probably around $25 million right now, give or take a few dollars based on how the deal is structured, whether through third-party sale leasebacks or syndicating it ourselves. I think $25 million is a reasonable target.

Our next question comes from Steve Olson, a private investor.

Congratulations on the quarter. Regarding restaurant-level operating margins, the last few quarters, they've been very strong, some of which may be the challenges in finding staff. But long term, has your outlook for operating margins improved, either due to changed labor staffing or the changes in just the units being operated, as you've added several new ones in the past few years and closed a few?

So that's a multi-faceted question I have to address. First of all, I believe the pressures on food costs will subside somewhat, but not so on labor costs. I think where we have rental deals, we will see substantial improvements—not just in margins, but in overall costs. Obviously, our increased lease expenses in Vegas will be greater than what our past lease requirements were. However, with revenue growth in Vegas and the aggressive pricing we've been testing, we have met no pushback whatsoever. Therefore, I believe that the increased lease expenses in Vegas will not significantly disrupt our overall operating cash flow from this location. We also have ongoing expenses that are difficult to manage, such as insurance premiums. The current insurance market is the worst we've seen in decades. We struggle to find companies willing to bid on our liability package that we’re renewing, which will come up to the mid-6 figures. Health care costs are also rising. So whether or not these price increases are offset by revenue increases remains to be seen. I wish I could confidently state that those menu price increases will remain stable, and we won't lose headcounts. However, I do expect we will lose some staff along the way, either due to customers not seeing it as a good value anymore or from competition. Thus far, I would say I am optimistic and believe wholesale prices will decrease. We're doing something new here that we haven't been smart enough to try in the past. Our chefs constantly adjust menus to attract customers to new offerings. However, now we are consulting our purchasing department, which is quite sophisticated since we not only buy for ourselves but for 100 others as well. We are asking them for alternatives to products on the menu that may be too costly, while still ensuring that customers will accept the new alternatives, and there are no supply chain issues. Our purveyors greatly appreciate the volume we provide them and are offering us better pricing if we opt for these particular products. Therefore, we are striving to refine our menu strategies and hopefully bring the costs of goods sold back to pre-pandemic levels. This will be a challenge. Supply chain disruptions are not over. I mentioned to everyone a couple of months ago that there were a few days in Southern Florida where we couldn't get French fries due to the lack of truck drivers for deliveries. This situation has been chaotic. My letter in the annual report, which was sent out just a couple of days ago, reiterated that we are managing chaos daily. I received a call yesterday from JB's, where we need to increase wages for some of our line cooks because they're being poached by nearby restaurants. They are being offered $3 more per hour, and while they are long-term employees, it's a significant increase for them. We are currently negotiating with 3 individuals to retain them. If they leave, we will be left in a difficult position as we have no replacements. The issue has been most pronounced in New York, where our volume has significantly declined. For instance, we used to generate around $800,000 a week at Bryant Park during the summer. However, in the winter, it drops to about $120,000 to $140,000 due to the seasonal closure of outdoor areas. This year, we are only doing around $40,000 a week because of COVID-19 concerns, cold weather, and the lack of events and patrons in office buildings nearby. There are about 6 million square feet of office space facing Bryant Park that are currently unoccupied. Thus, despite the challenges, we have kept all our staff. Cutting payroll would mean those employees would seek employment elsewhere, making it difficult to replace them later on. We have been managing inefficiently, but our results are strong thanks to the extraordinary dedication of our restaurant staff. These results may appear impressive to you, but we are not operating efficiently compared to our historical standards. We will improve efficiency, and I believe our margins will enhance, but this effort will take time.

Well, based on the results, you sure have been doing well because when I examine your labor as a percentage of sales, it's a few percentage points lower than historical levels—am I correct for at least the last 3 quarters?

Yes. Well, that's due to the revenue spike in Vegas and Florida and the effect of being short-staffed.

We were retaining employees on the payroll, even without the corresponding revenue.

Yes.

Yes. Well, I hope we can maintain or even enhance those benefits, because it appears there is an opportunity to improve from the historical restaurant-level operating margins?

There's an opportunity.

Yes.

Our next question comes from the line of Roger Lipton with Lipton Financial Services.

Yes. Mike, just in rough order of magnitude, New York, what was our revenue base in the fourth quarter compared to a couple of years ago? What do we lose?

I don't have those numbers in front of me, but it's significantly down.

30%, 40%, just what?

Roughly 30% to 40%.

Yes.

Okay. All right. Well, it sounds like as things normalize, people come back, you do less overtime, but it appears that price rises have probably lagged the increases in minimum wage and so forth. So it seems there’s a good chance that industry-wide price rises are on the horizon—more menu prices are likely to see increases. Is that correct?

So I would state that I'm not focusing on the industry—I'm focusing on my customers. My aim is to avoid leaving too much money on the table. I would indeed like to implement price increases, provided my customers accept them. The situation around Bryant Park involves many executives coming in for lunch; there are also secretaries who frequent our establishment. These are the customers I'm closely monitoring. If we lose that segment, I could be losing 10% to 15% of my customer count. I cannot lose them, and I am committed to every effort to maintain their patronage. This is true for most of my other restaurants too. In places like Hollywood and Tampa, we have captive audiences, and we can afford to be aggressive with pricing. For instance, at the Hard Rock Hollywood, we offer quality food at a relatively lower price point as many restaurants around us charge exorbitantly for similar meals. Because of this, we have continued to see high volumes of customers. However, in Vegas, we find ourselves in a middle-income environment at New York, New York. We see that many high rollers prefer upscale establishments like Bellagio and Wynn. Thus, we cannot afford to raise prices drastically. We must keep our eyes on those patrons who come to New York, New York, to stay at a budget-friendly hotel. Many are finding ways to economize, even bringing rice cookers into their rooms. Restaurant dynamics vary; we're trying to raise prices responsibly, focusing on retaining our clientele. Currently, Rustic is making impressive figures, but we must be cautious. We charge $125 for 2 pounds of King Crab legs, which cost us $106 to provide. We are close to a point where a price increase could drive away half our customer base. For now, we choose to keep our prices stable, being the only restaurant with King Crab legs available due to last year’s supply issues. We focus on customer retention, including product quality, service, and pricing. In essence, finding this balance is essential to our success.

Your perspective is valuable. You're not going to lead the way, but if the industry raises prices, you'll gradually increase your prices to cope. Your perspective is appreciated. Thank you.

You're welcome.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Weinstein for any final comments.

I just want to give you some insight into what's going on in this quarter. Historically, the March quarter is usually a rough quarter for us due to bad weather in the Northeast. We operate these thousand-seat restaurants in Sequoia and Bryant Park that do not usually host many events during this period, leading to generally slow business. The current conditions are even slower than has historically been the case. Traditionally, the March quarter is challenging for us to maintain positive cash flow. With Omicron extending into January, that created additional challenges. February seems to be improving slightly; people are returning to New York, although the office community remains absent. The same can be said for Sequoia in Washington, D.C., which has experienced a drop from roughly $400,000 weeks down to $40,000 weeks. This pattern has to do with full employment—we cannot afford to lose any staff now. January was particularly tough for us, and February will present challenges as well, but we hope for improvements moving forward. If we can break even during this March quarter, that would be quite the achievement. I believe that's achievable. Furthermore, when we reach the June and September quarters, they typically perform exceptionally well for us, especially if New York rebounds. If there are no further variants, we anticipate it will come back. We're experiencing an interesting trend; I have a friend who manages an extensive portfolio of around $60 billion with over 200 employees, yet he cannot enforce a return to the office. Many companies face similar issues, but recently, some large corporations have announced that employees need to return by February 28 and will implement firm attendance policies. That optimistically indicates some improvements are on the horizon. Several large companies are re-scheduling events that were pushed back, like a major gathering that was deferred because the CEO contracted COVID-19. Although we are not currently seeing cancellations, the event business is incredibly busy right now, with an overflow of phone calls. We believe that as we move into the September quarter and the first quarter of 2023, the calendar for December is looking promising with many event bookings. Overall, I think we are managing well in the face of chaos during these challenging times. My hope is there will be no further interruptions due to COVID, and if so, we expect to see this company thrive in terms of profitability. We're ready for it, and I am genuinely excited about what lies ahead. Additionally, I hope for opportunities to acquire quality institutional restaurants from owners who wish to liquidate their holdings. Thank you for your continued support. I truly appreciate your engagement today, and I hope you gained a good understanding of our current situation. We look forward to speaking with you next quarter.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.