Ark Restaurants Corp Q1 FY2023 Earnings Call

Greetings, and welcome to the Ark Restaurant's First Quarter 2023 Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Christopher Love, Secretary. Thank you. You may begin.

Thank you, operator. Good morning, and thank you for joining us on our conference call for the 2023 first quarter ended December 31, 2022. My name is Christopher Love, and I am the Secretary of Ark Restaurants. With me on the call today is Michael Weinstein, our Chairman and CEO; Anthony Sirica, our President and 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. Happy Valentine's Day. First, I want to have Anthony explain where we stand in terms of our balance sheet and the comparison with December of 2021, that quarter, compared to the current December 2022 quarter. Anthony, could you do the honors.

Good morning, everyone. Our balance sheet is in good shape. We have $24.5 million in cash and cash equivalents, which includes the CDs that matured on January 8. At the end of the quarter, our total debt stood at $21.6 million, while total equity was $61.1 million. Notable changes include a $4 million reduction in accruals related to catering deposits due to events held in December and the payment of bonuses and deferred FICA taxes from the CARES Act. Various accruals were settled during the quarter, which contributed to the decrease in cash balance since year-end. On the profit and loss statement, food and beverage sales as a percentage of total sales have decreased compared to the previous year but are aligning with pre-pandemic levels. We’ve effectively managed price increases and purchasing. Payroll has seen a significant rise, reflecting the current high unemployment rates, but we believe we are gaining control over this situation. As a percentage of sales, payroll aligns with the last quarter before the pandemic in December 2019, remaining at 34.8%. Our occupancy expenses have risen by about $900,000 from the same quarter last year, due to three main factors: COVID rent abatement deals from last year that led to lower expenses, increased Las Vegas rents effective January 1, 2022, and a rise in insurance premiums totaling around $220,000. Other operating costs have also risen due to inflation. Overall, it was a solid quarter. I'll now pass it on to Michael.

Thank you, Anthony. I want to highlight that the way we finalized the Las Vegas leases meant that the new minimum rents only took effect after we had signed the leases. Our accountants insisted that we should accrue expenses until the deals were finalized. As a result, the minimum rents were deferred. In the December quarter, we recorded expenses that exceeded the actual minimum rents for that period due to this delay in booking them. If I look at last year's quarter, we had approximately $4 million in minimum rents, out of which $600,000 contributed to this year's $3 million decrease in the minimum rents, with $300,000 attributed to the accounting for rent we were not required to pay related to our agreement with Bryant Park. This decrease impacted the December 2021 period, while there was a $300,000 increase due to the Las Vegas deals in the 2022 period. While Anthony may have articulated it better, I need to clarify these points. Overall, our business performed very well in Las Vegas, Alabama, and New York this quarter. New York saw significant improvement from events that were lacking or missing last year, particularly toward the end of the December 2021 quarter. Additionally, we benefited from favorable weather, as there has been no snow in New York, and the temperatures have been unusually mild, except for Christmas Day and a few surrounding days. We did experience some challenges in Florida after Thanksgiving, partly due to issues with Rustic, as our costs and menu prices increased while we attempted to maintain customer counts, resulting in less aggressive pricing. Consequently, customer counts at Rustic dropped significantly, leading to a revenue decline of about 17% to 18%. Other restaurants were off by 7% to 10%.

Sorry, it was very, very cold in Florida from the 23rd to the 29th. It was like 30 degrees down there.

In January, we observed a significant turnaround. Our restaurants in Florida performed much better compared to the same period last year. While I'm not sure what caused the previous dip, we have strong confidence in our Florida operations. For example, Shuckers experienced growth due to menu enhancements and an increase in staff, excelling by 20% over last January. Blue Moon is also performing well, especially after we added approximately 50 new seats following approvals from the Army Corps of Engineers and the city to extend the dock into the intercoastal waterway. As we enter the season, those added seats are being utilized. Our joint ventures are flourishing too, with a record week at Hard Rock, where our typical revenue is around $175,000 or $180,000, but we've recently reached $220,000. Everything I've gathered suggests favorable demographic trends. In New York, the mild weather contributed to great business in January, as did Washington, D.C. Our main concern for this March quarter isn't revenue, but we are closing Gallagher’s in New York for renovations, connected to our lease negotiations. This closure, which began last week and will last until the end of March, is expected to impact sales by about $2 million. We've put measures in place to support our employees during this period, understanding that the renovation is part of management decisions with MGM. Once complete, I believe this renovation will result in a more attractive restaurant, particularly with increased activity from nearby attractions like MGM’s Park and the T-Mobile arena. Despite the impact of fluctuating food prices, our overall business remains strong. We've successfully hired the right talent, and while labor costs are a continuing challenge, the struggle to find suitable candidates has eased significantly. Regarding the Meadowlands, we are optimistic about our chances of obtaining a casino license, especially with New York planning to issue licenses for downstate casinos. The Meadowlands is only a short distance from Manhattan, which provides a strategic advantage. We foresee that such licensing discussions will become critical, especially given the declining revenues in Atlantic City. The Meadowlands area is already environmentally approved for a casino, with no anticipated legal challenges. The racetrack is ready for the casino’s initial phase, and we believe this proposal will be positively received. I'm happy to take any questions.

Thank you. Our first questions come from Roger Lipton with Lipton Financial Services. Please go ahead with your question.

Hi, good morning, Michael. Good summary, as usual. Just one quick question, I was a little confused about the rent situation which you talked about catching up in Vegas and - what else was it? I've forgotten it - whether it was $300,000 or $600,000 in total. The $300,000 in Las Vegas and the other - and they're just confusing, whether it was three plus three or six plus three?

No, it's three plus three. The three in the December '21 quarter was a reduction of rent because we signed or finalized an agreement and signed an agreement with the Bryant Park landlord, which we always knew we had that department of rent that became just a forgiveness of rent. And that was signed in that December 2021 quarter. So the $300,000 became a deduction from our regular rent payments. So sort of skew the December 2021 quarter by $300,000 of increased income.

Well, okay, that's fine, thanks very much.

Yes, I'd like to point out that - the Vegas leases, the minimum rent that we're paying now. We pay percentage rent. So once we get to a revenue level where the base rent is a certain percentage of revenue, then we start to pay percentage rent. It's a breakpoint and a natural breakpoint. So the minimum rent becomes a moot point. We're basically on a percentage rent at that point and the annual rent will be based upon what the percentage is. And our percentage rent is slightly higher than it was in the old lease. So we think we're a percentage around the payer. We don't think the basic minimum rent will affect our profitability at all in Vegas. I hope that helps.

Our next questions come from the line of Paul Johnson. Please proceed with your question.

Yes, good morning. Just on the Meadowlands, can you give just your best guess? It can be a wild guess regarding the possible timing? I realize there are forces beyond our control, including government officials and all that. But what would be your best guess if you had to make money?

I think you got - I differ a little bit from my partners. We're the third-largest shareholder. A developer, Jeff Coral, in New York, is the largest shareholder, and then Hard Rock is a 20% shareholder. And I guess, on a fully diluted basis, we're at 7.8% of the casino. I want to remind everybody that we have exclusivity on all the food and beverage if the casino is built with the exception of a carve-out for a Hard Rock Cafe. So my partners strongly believe that it's not the issuance of downstate licenses that will be the tipping point to get New Jersey moving, but really to have casinos open in New York and to see what that's doing to Atlantic City. I take the attitude that this whole thing will go into motion once they start to issue licenses. And if they issue a license in Manhattan, and there are several groups, we later being one of them. And Hard Rock being another one, by the way, interested in casino licenses within the Manhattan area, not in Queens and not in Long Island. I would think that would be enough to get New Jersey moving. So, I think we're a year away from that. And then there has to be a referendum to change the state constitution to allow for a casino outside of Atlantic City. So I think we're two years away, that's what I think.

That's helpful, thank you. And are there - what is the governor's position or the senator's position? Has there been any conversation among the higher-level politicians?

Murphy has always been in favor of it from what I'm told. I think he's had some direct conversations where he has said that. The legislature, I think, is more inclined positively than they have been in the past, because the new legislative body from the last election, I think is better for us. If I look at the key people who would move the legislation forward. So, I think the situation has improved, but it's still very speculative.

Understood, thank you. And then - can you give us an update on any possible acquisitions? And are we correct in sort of thinking that the acquisitions that you'd like to make are going to be more and more in the Southeast and the Gulf states or is that just been the recent trend?

I'd like to say one more thing about the Meadowlands just so you get an idea of why we think we're in such a strong position. The Meadowlands does more sports betting than all the Atlantic City casinos put together. And I think it's either the first or second best sports betting site in the country. So there would be an inclination, I think, given that traffic and the amount of betting that's already taking place at the Meadowlands that that would be the favorite site for a casino in the North. So in answer to your other question, we're constantly looking. We happen to have two very smart business brokers in Florida who show us deals. Recently, we've been looking at four deals. We sort of discarded - and we look, and we go, this is it, and we kicked the tires and we have our criteria. Two of those deals, we're very much focused on. No documentation has been signed for either one. I would expect we would do one of them in the next two or three months, maybe both of them. But I have high hopes and feeling that we’ll get to terms - fair terms for us and the seller on one of these deals. We're always looking. The Southeast is very attractive to us for a series of reasons. Number one, it's business-friendly. New York is not business-friendly. I would never build another restaurant in New York. The amount of business we can do in Florida equals anything that we can do up here given the size of the sites and where they're located. And the rents are substantially less. The legislators are more favorably inclined than New York is to pass business laws that don't add additional expenses to operators. So yes, we're focused more on Florida and the Southeast than the Northeast.

Thank you. I guess part of - as long-term investors, I mean, you guys have done a great job certainly and the acquisitions you've done have been at super multiple, super low. The challenge with having a decentralized restaurant base that doesn't have a sort of a common brand is that as you noted in your 10-K, I think your terminology is something like fixed costs don't decrease proportionately with sales? So the hard thing is how do you ever get to much higher levels of EBITDA leaving aside the Meadowlands opportunity unless you just have a lot more restaurants to spread over that fixed cost base?

So it's certainly a fair question. And if you just look at the stock price over time, it hasn't moved very much, but we have been a dividend payer and we paid a couple of special dividends along the way. We're very aware of your comment. And I guess, if I go way back, and I'm going 25 years back, when we did the Las Vegas deal, all of a sudden, we were doing in those dollars, $35 million or $40 million in one location. We said that's the model we want to replicate. We want to find those locations where we could put in a lot of different concepts and have the economics of one general manager, one executive chef over seven, eight, ten operations in one site. That never worked for us. We were never able to find the site. We came close twice. We were very close pre-pandemic, and then the pandemic shut down that idea. We were looking at a site in the Midwest, and the developer and us just decided during the pandemic not to go forward. So that was always the idea. Then what happened is when we bought Rustic, Rustic was doing $1.5 million and for $7.5 million, we bought the $1.5 million, but we also bought the land underneath it. We thought it was a mispriced restaurant back then, and we thought we could improve the $1.5 million. The economics of doing a sales leaseback were hugely favorable. I mean if somebody - it didn't make a difference to the capital, I'll use. If we were going to pay somebody $1 million for - on a sale leaseback, if we're going to pay $1 million in rent, we thought we can get $12 million for something that we paid $7.5 million for and still have an operation doing $500,000. And by the way, that operation grew from doing $1.5 million cash flow pre-pandemic to $3.4 million. And every restaurant that we acquired in Florida where we had the land or in Alabama, those dynamics were working. Now they're working less with a 6% interest rate today than they were when interest rates were 2% or less, I guess. But we were looking to build, and at that point, our eyes opened up; we said, 'Hi, let's try to buy the real estate.' You can't do that in New York, but you certainly can do it in the locations we were looking at in Florida and Alabama. So those are the primary situations we look at. Now in Blue Moon, we couldn't buy the real estate, but we bought an operation that was making $1 million a year to $2.7 million, and we negotiated a new 26-year lease with the landlord. So 26 years, it's not quite the same as owning it, but it's pretty close. So those are the situations we're looking at. They're one-offs. We're not going to look at anything that earns less than $1 million, so that's sort of the jumping-off point. But we've seen a few things that do much better than that. Haven't been successful in coming to the economic terms that we want to dictate to ourselves, but they're out there. I think that's the way we're going to grow. Obviously, we have great hopes for the Meadowlands, and that would sort of follow this idea of what we did at New York, New York if the Meadowlands became a casino. I'm sure there are eight to ten restaurants in there, a few bars, and that could be a $50 million or $60 million business for us. We have a balance sheet that's, from my point of view, deleveraged and we also have credit lines beyond that. So we're prepared to do a bigger deal if one came along. We just haven't found one with the right economics. So we're sort of growing marginally with one-offs. But that should be the expectation, honestly, until we show you that we could do something bigger than that.

I appreciate that, thank you for that color.

Thank you. Our next questions come from the line of Mo Salto with RMR Capital Partners. Please proceed with your question.

Hi Michael, great call as usual. All of my - most of my questions were answered thoroughly. I just had a question about the operating lease liabilities. I just want some color. In terms of leases that you guys have signed, are there any corporate guarantees associated with them? Like what portion do you expect that you would own if you had to shut down a restaurant or is that unique to each - location?

We don't cross guarantee anything here. There are no corporate guarantees on anything we do here.

There might be one or two out there, Michael.

Like what, Anthony, I don't recall any.

Isn't Robert guaranteed by Ark?

No.

I think there's one or two, but I'm not sure which ones. I mean, we can follow up with you off-line, Mo.

Yes, I don't recall anything.

Thanks so much, guys, and great call.

Our next questions come from the line of Jeffrey Kaminsky with JJK Consulting. Please proceed with your question.

Good morning, guys, good morning Michael another great quarter. Just a follow-up to a comment you made regarding share price and dividend. I think you said in the financial weekend earlier that numbers are back to pre-pandemic 2019 quarter. Obviously, the dividend was eliminated during the pandemic for obvious reasons and stock prices, are relatively flat now with some volatility during the pandemic. Obviously, there were some - given the current state of finances and I assume - the interest rate environment being what it is, are shareholders kind of screwed even if the stock didn't do anything we got paid the way by it? What was a better dividend that we're getting now? Is there any discussion in consideration as I think the dividend back to pre-pandemic levels, or perhaps some sort of special dividend as shareholders remain patient, waiting for the next move? Thank you.

Jeff, how are you? Every Board meeting, we discuss the dividend. And as our balance sheet has been bolstered by two things - the business is doing better, obviously, and we're not finding ways to spend our capital or our cash on the balance sheet fast enough. We discussed it. Look, my interest here honestly has been to protect my shareholders. And maybe I've been a little bit too conservative along the way. Maybe there were deals we should have done, or where we should have been more aggressive about bidding for them. Maybe leases that we should have signed that required a guarantee that I didn't want to put the company on the line for, but the goal here has been to protect the shareholders. We never had a lot of debt. We've never been in a position where we can service the debt that we did have. And so that conservative nature is sort of shared by most of my Board members. We have a couple of Board members that would be more aggressive than with the dividend than the majority right now. But it is up for discussion. And every quarter, we discuss it. I think as we get further away from the pandemic, the likelihood is that we will revisit the dividend and there may be an increase. But right now we like the cash position we're in, and we like our balance sheet.

Thank you, guys.

Thank you. Our next questions come from the line of Roger Lipton with Lipton Financial Services. Please proceed with your question.

Yes, Mike, I have to follow that - with capital allocation. I was going to ask, and I will ask what would be the timing of your CapEx in Las Vegas? How much will you spend and when?

So this year, our obligation to MGM, we have essentially three leases out there, all of which - there are three leases and there are also letter agreements. The letter agreements sort of cover the banquet business, the room service, pool service, the employee dining room, none of those things need renovations. The three main leases are for the Village Streets, which is sort of like a fast food area in America, which is their 24-hour restaurants that we have and Gallagher's. The obligation this year for Gallagher's is certainly under $2 million, probably $1.5 million, but we're just in the process, and we don't know if there's going to be cost overruns, but we think Sam and Jennifer, who are the key players along with the local people in Vegas, but the key players here have really gone over those numbers with Linda Clous, who is our facilities manager and oversees construction as well, so I think the likelihood is $1.5 million in CapEx. But please remember beyond that, we're paying people who work for us there, 70% of their salaries, even though they're not working, which we're utilizing them for other things where we can, but there's a staff there that's being paid. So if you included that, I guess that number goes to $2 million with the payroll. We don't have any obligation for the rest of this year other than to give them a plan for the Village Streets, and I don't think the Village Streets will be very expensive, maybe $2 million. There are, I think, eight outlets in the Village streets and we're considering building one more. So maybe a couple of million dollars, would that be close, Sam?

Yes.

So figure $2 million. And then America comes up in 2025. And America is doing great. I mean we've had 11% compounded growth there last year from the previous year, and we're running ahead this year. I don't know that we'll ever have to do America. It's basically New York and MGM's call. But they've taken a wait-and-see attitude because the restaurant is doing really, really well. So it’s - certainly, the CapEx in Vegas is not a factor when you - I think you're trying to look toward the dividend and see if that would be impactful on the dividend. We're not concerned about that when we make a decision regarding the dividend.

Mike, just real quick, that sounds like $4 million combined maybe including the payroll, is that lower than the numbers you had thrown out previously, if I recall?

Yes, well, the total obligation was $7.5 million, but the majority of that was going to be spent in America.

Okay. Well, that's good news. Okay, thanks very much.

You're welcome.

Thank you. There are no further questions at this time. I would now like to hand the call back over to Michael Weinstein for any closing comments.

Right, I hope I was clear. It's Valentine's Day. Happy Valentine's everybody, and we'll see you at the next quarter's call. Take care.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.