Ark Restaurants Corp. (ARKR) Q1 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ark Restaurants First Quarter 2012 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Chief Financial Officer, Bob Stewart. Please go ahead, sir.

Thank you, operator. Good morning, and thank you for joining us on our conference call for the first fiscal quarter ended December 31, 2011. With me today on the call is Michael Weinstein, our Chairman and CEO; Vincent Pascal, our Chief Operating Officer; and Holly Cassidy [ph], our Secretary and Legal Counsel. For those of you who have not yet obtained a copy of our press release, it was issued over the Newswire 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 afternoon 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 will now turn the call over to Michael.

Hi, everyone. The December quarter was marked by a series of events. Number one, revenues started to perk up in Las Vegas. This has been in a free fall since about 3 years ago. And we started to see some improved comp sales in June and July, and that has continued. And as the quarter got in play, we were seeing 7% to 10% increase weekly on a regular basis. Interesting to give you a sense of what we would see in the Vegas. We have about 25,000 square feet of banquet space at New York-New York Hotel that prior to 2008, regularly did significant business. By the time we got into late 2009, 2010, we were doing no business in that space. There was just a complete absence of any meetings, any banquets, and it's only recently, in the last 4 or 5 months, that we've begun to see a little business in that space. So we think Vegas is on an uptrend. It's not a steep incline. It's a gradual increase. We got to remember that more rooms are available. More restaurant seats are available. More banquet spaces are available than there were 3.5 years ago. And sort of for us to do better, we have to eat through that extra supply, and that has to fill up before we really do much better, but we're doing better. New York was blessed with very good weather, which helped our revenues on the East Coast: in New York City, in Washington, D.C. and Boston. So revenues were better. The second factor is that it's important to understand this quarter is -- sort of in midsummer, we made a really radical decision for us about how to treat the rising prices of our food products that we will buy. We did 2 things. We increased prices by 2%, which supported [indiscernible], but we reengineered our menu. And in many cases, our portion of protein are slightly smaller, not really, we think, noticeable, but they are smaller. And we have rewritten menus to use product that is less volatile on the upside. So our cost of goods sold came down on the prior year but more importantly, on the prior months before the December quarter. So margins improved. So I think that was most of what's responsible for the better P&L: increasing revenues, better cost of goods, widening margins. There were other events that took place in the quarter, which I think are worth mentioning. Number one, in October, we purchased 250,000 shares back from a deceased shareholder. We bought that stock for a price of $12.50 a share. The math works out that it was an over $3 million purchase. We paid for it with $1 million down and notes that start next October -- December, excuse me. So the 12-month lag from the time we purchased this stock to when notes start, and those notes go for 24 months. So we're paying for that purchase over time. The second thing that occurred is we lost The Grill Room so -- which has been a long-term lease. Brookfield, the landlord of -- and subtenant, which is in Lower Manhattan, decided that several leases terminate, not only ours but several others and to redo the facility and potentially eliminated food service through New York [ph]. So we were able to get $350,000 from the landlord for a termination fee because we closed down slightly before the end of our lease. So that $350,000 is in our P&L. But also, Robert Towers, who was our COO, retired, and we also approved his $475,000 severance fee for him. So that sort of gives you a picture of what went on in December. In January and early February, we have seen very strong results in terms of comp sales. Again, the weather has been very good, but Vegas continues to improve. The Northeast just seems blessed with this great weather, which is probably helpful, but we see a very strong customer demand for what we're doing in New York City. We would like -- I'd like to open it up to questions at this time.

[Operator Instructions] And we do have a question from the line of Mark -- of Mike Margolis, whom is a private investor.

Mike, I noticed that overall sales were up about 2.1%, and the same-store sales were up 8.9%. Can you speak to the differential there, the size of the difference?

I think if you're looking at total revenues, there's -- included in the total revenues are have variable interest entities, which when we're looking at our same-store sales as opposed to the variable interest entity sales, it affects the ratio. I mean, if we're looking at just straight same-store sales, we're talking more of along the lines of the 9% increase. The variable interest entities has a way of weighing on that. Plus there is -- on the total revenue line, there are other revenues that are included on -- in there. So if -- the total revenue number includes other than miscellaneous revenue that don't necessarily time right for the quarter, but that's -- it's really the variable interest entities that have created the -- these differences.

But were the variable interest entities are present in last year's figures as well?

Yes, but they -- the variable interest entities, we had decrease in sales at our property in Hollywood. So that's affected the same-store sales numbers, if you're looking at revenue-to-revenue number.

So Michael, when we're talking about comp sales, we're not talking about variable entity properties. What used to happen is we would just report our share of the profits, management fees and profits in the management fee line. Regulation changed a little over a year ago, where we now do it differently, where we report 100% of the revenues and then back out the variable interest entity's share of those expenses. And what's left is what would be our management fee and profitability. But in Hollywood last year, because of the change with marketing at the Hollywood casino, the way they deal with the comps, our sales went down. And it went down enough in Hollywood that the increase of sales, of revenues through variable interest property are not that significantly higher, but the comp sales in our restaurants in Las Vegas, Boston, New York City and Washington were the higher number, close to 9%. I hope that [indiscernible].

So you think 9% is representative of...

Everything but Florida.

Of how business is increasing. In Florida, it was down fairly significantly?

So in Hollywood, it was down about 15%. Tampa was up, and Foxwoods was down, which is another variable interest entity. So those are down. Now in truth, sales being down in Hollywood and up in Tampa, our profitability was about the same, but it has more to do with the efficiency of payroll and cost of goods sold. So even though sales were down in Hollywood, the combination of better efficiency and some higher revenue numbers in Tampa kept the profitability about the same for interest [ph].

So your higher efficiency was a major player in this quarter's results?

Yes, in cost of goods sold especially.

Okay. Okay. Can you speak to the openings that you're scheduled to have in the near future?

Yes. Well, sometime in the next 3 weeks, we're opening Clyde Frazier's Wine and Dine, our partnership with Walt Frazier, a 10,000-square-foot facility. We have the correct land deal. Our deal with him is very fair. There's been a lot of buzz about the restaurant. This was designed by Thom Mayne several years ago. We had just found many, many years back its decent [ph]. I think it was done extraordinary. It's unlike anything that I think people will expect, just extraordinary, extraordinary design. It's in a upcoming area of New York, which is Midtown West. There are about 9,000 condo units that have been built in the last couple of years. There's extraordinary expansion and construction going on there right now. In the next couple of years, I think there'll be another 15,000, 16,000 units. The High Line is going to be extended up very close to the restaurant. The Javits Center is just a walk away. So we think that that demographic is very, very strong. It's all not so far away [indiscernible]. And he's an icon of New York, so we think we've got a very good chance to have a significant [indiscernible]. Basketball City, which is the basketball facility next to [indiscernible] basketball. That's a 66,000-square-foot basketball facility on Manhattan's East River down South Manhattan. We are opening small restaurants there, probably 8 new. But the safe thing is we have to include [indiscernible] this facility, and that is the house facility. It's not a new facility. It's easy loaded, easy access. They've done significant events before we even signed our deal, 5,000 personal parties, i.e. big parties: PUMA, the introduction of Volkswagen. There seems to something constantly going on. And as a provider of food and beverage, we think it works very, very well And then the last thing, we're pretty much finished with the lease contract for the new Museum for African Art on the Upper East Side of Manhattan. That's in the northeast corner of Central Park. We have a 300-feet outdoor cafe with a full enclosed restaurant serving it, and then we have 6,000-square-foot catering facility that would be catering to it. But that won't be opened till next fiscal year but very -- again, a very exciting project. We are looking at some stuff in Vegas that will happen next year. We are also pursuing some other sites in New York, in the New York City area. So we're busy.

Is Robert continuing to do well?

Robert continues to do extremely well. As a matter of fact, this is Fashion Week in New York, and the fashion press has essentially booked out Robert for the 4 days of the 7 days of Fashion Week. We are seeing extraordinary volume of demand from private parties there. We were booked out literally the whole month of December for private events. It's a very strong -- sales continue to go up. Profitability continues to drive. It did very well to last year. We're also producing [indiscernible] some changes in the facility, which will enable us to house more people for private events. If that were to happen, we could achieve a higher revenue number. So it's constantly building. One thing, as you know, in previous conference calls, I had meetings with shareholders. We had no public relation people working for us on our restaurants. We do very little advertising, almost 0. Robert is in the ninth floor restaurant on top of [indiscernible] with panoramic view of the city and Central Park. It's sort of following the same course that our restaurant, Bryant Park, followed about 15, 16 years ago. It took concierges and tourists a while to find the place. There's no effective way that we can advertise it. We do have concierge parties, but you can't take ads out in every country to say, "Hey, here we are." So the word of mouth is very strong. And any night you go in there, it's 6 to 7 languages now. Tourists are starting to find it, and we're just in an updraft there, barring any economic slide in the New York economy. I mean, I think we just [indiscernible] to that restaurant.

And our next question comes from the line of Ben Smith whom is a private investor.

Glad to see the continued improvement in regards to the revenue, and then -- and finally, the margin is starting to show some of the impacts in regards to that. As you look forward here from a dividend policy standpoint, recognizing you can't project the future out and stuff, but would it be your intention or your goal as the management team to try to maintain the dividend structure as you have it today as we go throughout this year?

I'm going to repeat something that I said that I think I've been consistent on. Somebody may correct me, but I think I've been consistently. We're dealing with the cash flow here and a minimum level of comfort, which we put at about $10 million in cash that we would like to have sitting around available [ph] for opportunities. When we get to that number and if there is an excess, we're going to distribute it as we have in the past. Right now, our -- we're going to retain the dollar dividend. Our cash right now is probably the lowest it's been in 3, 4, 5 years. It's winter. We have no outdoor facilities. Those restaurants, which are geared to outdoor seats, we have thousands of them, carry payrolls that make them unprofitable during this time of year. I think payrolls can cut back. But we can't cut back far enough, because we have key people that we don't want to lose, who are important for production, especially at Bryant Park and Sequoia. I mean, each one of those has -- Sequoia has 600-and-some-odd outdoor seats. Bryant Park only has 1,000 outdoor seats. So you have to keep the key people even though you're not doing business. And so our profits, they're always squeezed in the March quarter, and right now, we're building Clyde. And we have tenant improvement money coming back from the landlords, which is considerable, $2 million or nearly $2 million, which we haven't received yet, not because the landlord doesn't want to give it to us. It's just that the paperwork that has to be signed off isn't quite ready. We also have money coming in from sort of the fire -- the water damage at Sequioa in Washington, D.C. That was an event in the June quarter the last year, and we're still negotiating our tenant improvement money -- excuse me, our tenant repair money, facilities repair money with the Liberty, which is our insurance carrier. So we have -- we come into March with the new restaurant, with a lot of preopening cost, a lot of big construction budget. We are way below the $10 million, but that will build up very, very quickly. And once we get into the June quarter, I think, we start to see -- this ticket turns on. We start to see a lot of cash. And I'm sure by the end of June quarter, even though we -- and also, extended to this is we've also -- this business with Clyde, we'll be building out Basketball City. So we're active at this time of the year with construction and preopening expenses, the 2 facilities when it's the worst cash flow period in our fiscal year. So I think you get back to June, we'll be comfortably above $10 million based upon cash flow projection, tax rate, and then we can look at dividend policy again. Our intent is to dividend out any money that we can't use. So we have a dividend profit share. If we find more money that we're not going to use, we're just going to declare a special dividend [indiscernible].

[Operator Instructions] And I'm showing no further audio questions at this time. I'll now turn the call back over to management for any closing remarks they may have.

Well, I guess, I should be a little trite and wish everybody a happy Valentine's Day. So we'll see you next quarter, and thank you for attending our conference call.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation, and you may now disconnect.