Ark Restaurants Corp. (ARKR) Q2 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Ark Restaurants Second Quarter 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Bob Stewart, President and Chief Financial Officer for Ark Restaurants. Thank you, sir. You may begin.

Thank you, operator. Good morning, and thank you for joining us for our conference call for the second fiscal quarter ended March 28, 2015. With me on the call today is Michael Weinstein, our Chairman and Chief Executive Officer. For those of you who have not yet obtained a copy of our press release, it was issued over the newswire, Friday, and is available on our website. To review the full text of that press release along 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, everybody, There's a lot going on in this quarter, so I think it's best that I explain it venue by venue. Las Vegas. We were down 6.7% in same-store sales. Two things are going on in Vegas. At New York, New York, there is tremendous amount of construction as they get ready for the new arena, which has 20,000 seats, which is going to be adjacent to New York, New York. But there's also been a lot of competition added in anticipation of demand from the arena. So we have several new restaurants on premise or adjacent to us between the construction and the additional competition and the fact that the arena is not ready yet and that demand won't flow into us until the beginning of 2016, our sales are suffering. So we're down 6.7% there. New York, Washington D.C., Atlantic City, Boston and Connecticut. We had a very harsh winter here. New York sales, our restaurants are doing very well. The fact that we're even in such a difficult weather environment, I think, speaks well to what we're doing in those restaurants. It's interesting. For the 26 weeks, we're up 9.9% in New York. So those are strong restaurants performing very well. We had a lot of bad weather days. Washington D.C. Two things are going on. One is weather. We're down 7.2% on the quarter on same-store sales. But more importantly, Union Station, where we have 2 of our 3 Washington D.C. operations is under construction. That construction is quite severe for us. Our entrances are blocked most of the day, and there's a lot of hammering and construction going on, and it's not a pleasant place to sit. We're still profitable in Union Station, but our sales were hurt dramatically. Interesting, for the 26 weeks, we're up 2.4%, so the construction really affected us in this quarter. Atlantic City. We're doing extremely well. I would say that that's mostly due to resorts converting to a Margaritaville theme. It also has to do with the fact that there are fewer hotels operating, and we're catching some of the demand that used to go into those other hotels. Boston. Again, a very severe winter. We were down 15.5%. In Boston, I think you know, it was under 5 feet of snow most of the time. There were a literally days at Faneuil Hall where Durgin-Park did no sales. Again, through the 26 weeks, we're up 3.8%. So the winter was really severe there. Connecticut. Same thing, down 7%. We're about flat on the 26 weeks. And Florida is a case where we've discussed this before, we discussed it in the letter to shareholders in our annual report. Comps have been eliminated as a marketing tool by the hotel. We used to get a significant amount of our sales from comps. The hotels were given to players to attract them to the facility. We would get reimbursed anywhere from 85% to 90% on those comps. The elimination of them has hurt sales, more so in Tampa by about 40% and probably around a little under 25% in Hollywood. We're still very profitable in those 2 facilities. On an annual basis, I can again say what I said the previous conference call, all our restaurants are profitable. Clyde's is doing much, much better in New York, it continues to gain strength. And we'll be very happy next couple of years as the area develops. Our leases are now in good shape. The fall off on the leases that expire, it's practically done. We have one more significant lease in Vegas, the V Bar, which ends at the end of this year. But we feel our business, from a lease point of view, is now in very good shape. We're renegotiating some significant leases, I think, on favorable terms to the company. So that's basically it. Meadowlands. We -- well, before I talk about Meadowlands, let me talk about the Rustics in Florida. The Rustic Inn in Fort Lauderdale has been a great, great investment. As you know, we bought the land, the property and the operation for some $7.5 million. When we looked at it, it was making about $1 million operating profit. We thought the menu was too cheap. We took a deep breath. We raised prices. This is almost 6 months ago now, and sales have flourished. The operating profit is well in excess of $2 million now. We opened the second Rustic in Jupiter, Florida sometime in January of this year. Part of our operating results, which I haven't address yet, is some $600,000 in preopening expenses in Jupiter. We were late in getting into the season. That season starts pretty much right after Thanksgiving and extends to early April. We had a couple of very good weeks as the business built up and people became aware of us. We did some marketing at minor league baseball stadiums and elsewhere. We reached $180,000 week once. Most of the time, we were at $160,000, $170,000 range. We thought that was a really good performance for new a restaurant. Even though it does have a brand in South Florida, we were very pleased with those sales. And we think we will do better than that this year when we're opening in the heart of the season. That restaurant is extremely seasonal. We've seen sales drop about 50% as the summer rolled in. Again, the awareness of the restaurant is decent, but not great yet. We think the brand is a value. The Rustic Inn Fort Lauderdale continues to have record-breaking weeks every single week. I'm happy to report that Mother's Day, there were a lot of people eating crab. We did $122,000 yesterday in Fort Lauderdale. So the brand has merit. I think we'll do very well in Jupiter. We are looking to acquire another restaurant in Florida. Again, the property and the operation, contracts are out and nothing has been signed yet. As soon as something is done one way or the other, we'll let you know. Now back to the Meadowlands. We think, and we are comfortable with being able to say that we are pretty much certain that a license will be -- legislation will be written for a license at the Meadowlands for casino gaming. Whether it's this year or next year, I can't predict, but I'm fairly confident that it could be this year. That would mean that the legislation would have to be written by this August. It will go on the ballots, it's really a -- an amendment to the Constitution to allow for gaming outside of Atlantic City. So voters will have to vote on it. We have done some polling. We think that measure will pass. Not overwhelmingly, by the way, but we think there's -- even with a narrow factor that there's a good percentage possibility that we will see that passed. So it's question of 2 things: whether or not legislation gets written in time for this year's ballot; and if license is issued to the Meadowlands, where in the Meadowlands is it going to be issued? Will it just be given to us because we own the Racetrack or will it be an RFP? But there has been progress made. We do not think we'd be this position with legislation as quickly as we have been, so we are hopeful. I guess now I'll take any questions.

[Operator Instructions] Our first question today is coming from Bruce Geller from DGHM. Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC: When do you annualize through the difficult comparisons in Florida? It seems like it started at least a year ago.

We just finished. Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC: You just finished?

Yes. This is the last... Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC: So in the current quarter, we shouldn't see comps down anywhere near...

We'll have a little bit left -- Bruce, we'll have a little bit left over in the current quarter. Bob can give you exact date.

Yes. The policy, the no-comp policy started on May 5 of last year. So we've seen that -- the last few days, sales are actually up at both properties, both Hollywood and Tampa. So we would expect going forward that we'll have probably a positive sales increase. But it's -- we don't know how much at this point. But it looks good for us right now going forward from this point. Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC: Okay. And you touched upon the severe winter. Can you comment at all on the past 6 weeks since the quarter ended, with some turn in weather, how things are trending without the weather as an issue?

We think we're doing fine. We're not up a lot, but we're up. I don't have anything to say. Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC: Okay. Well, up is better than down 6. So that's good. And then you also noted you're looking to acquire another Florida restaurant. I'm assuming you can't give many details on that at the moment. But I'm just curious, as we look through the rest of the year, what else do you have on your plate in terms of new development or potential acquisitions? Would it be just that one item for the rest of the year? Or do you have other things in the works?

So let's -- let me just backtrack a little bit on that 2 Florida things for you, the 2 Hard Rocks, and then I'll answer that question. In the 2 Hard Rocks, we sort of have this interesting relationship with Hard Rock. They're our partners at the Meadowlands, along with Jeff Gural. And on the other hand, they've made a marketing decision which negatively impact us. The thing that we have going at the 2 Hard Rocks that I don't want anybody to lose sight of is we are the exclusive provider of quick-serve fast food within the casinos. These casinos are both in expansion mode. And so I think our sales will benefit even if they put in additional full-service restaurants. I think as they make the footprint bigger and more interesting for customers, we should see some benefit at the fast food court. So I would take a guess that our sales will be not as strong as they were when we're doing comps, but they should do better. Philosophically, we're in a difficult capital allocation predicament right now. Obviously, we have a very under-leveraged balance sheet. We have the -- with the exception of a Hard Rock Cafe, if there is a casino license issue to the Racetrack at the Meadowlands, we have an exclusive on all food and beverage. So we have 2 investments to make. Number one, if the casino license, I keep saying this, is issued to the Meadowlands Racetrack and it's not in our RFP, and we get -- and I think that's a likely course because the state of New Jersey needs money, and we have a building that was built not only as a grandstand for a racetrack but that can service about 1,000 slot machines right now and some table games and we could be in business -- once legislation is written and a referendum passes, we can be in business in literally 30 days in the grandstands. That is not the whole of the casino development. Eventually, this thing will have 4,000 to 5,000 slots and substantially more table games. But if we could be in business quickly, there will be cash flow that will be available, hopefully, assuming that there is cash flow, towards the buildout of the rest of the facility in the stages as it comes. Obviously, there's going to be equity needed. There's going to be debt financing on this thing. We own 11.3% of this thing. We don't want to be diluted. So we have to sort of husband [ph] our money right now to make sure that we're in a position not to be diluted. And probability is we will be both -- some of our equity, our own cash flow and some debt to not be diluted. And then we have this situation where our agreement with the casino, while the exclusivity is very -- I mean, that's down pat. We have exclusivity, again, with the exception of Hard Rock Cafe. The agreement as it now reads says we will sign leases similar to other leases we've signed in other Vegas -- in other casino facilities. We've signed leases in the past with Hard Rock at Tampa and Hollywood. We have New York, New York. We have the Venetian. We have Planet Hollywood. Those deals are all not the same. So there's going to be a negotiation as to how much tenant improvement money is included in this deal and how much money Ark is going to come up with to build restaurants. So we have capital allocation concerns. Not that we can't handle it, we think we can, but we don't want to be diluted in our ownership of the casino and we don't want more shares outstanding to finance this if we can help it. So that's our priority here. So we -- if we are buying something, we're buying cash flow. And if we're buying something with significant cash flow, it takes significant capital, and we better be pretty sure that what we're buying makes a great deal of sense because the alternative, which is perspectively out there but not firmly out there of keeping our position in the casino intact, the potential casino intact, is far more important than anything else we could be doing. That is our view. So we are looking to pick up stuff, to bolster operating profits at very reasonable multiples where we own property. We are looking at one large lease in New York that will take a significant amount of capital. And fortunately, that negotiation is going to take some amount of time because if I had to make a decision today, I don't know that I would be positive on it because I would be saying to myself, "I'd like to wait until August to see if legislation is going to be written for the Meadowlands." So we're in a difficult position right now where capital allocation, the priority is toward the Meadowlands. But that's something that may never happen. So we have to grow the company without that, but a lot of bets will be often in terms of negotiations we're presently in if a casino license were issued. We'd be focusing on that. So does that sort of make things clear? Bruce Howard Geller - Dalton, Greiner, Hartman, Maher & Co., LLC: Yes, that's helpful. That's helpful. How will -- how -- I mean, could you give a sense of potential size of this other Florida investment? Is it -- like how meaningful is it in terms of capital needs?

Same deal as the Rustic Inn, Fort Lauderdale, pretty much.

Our next question today is coming from Chris from [indiscernible] Capital Partners.

Can you walk through the new Rustic Inn restaurant and the seasonality with that and your expectations once you've had a -- once it's been up and running for a year, do you expect the seasonality be much more so than what it appears at the Rustic Inn in Fort Lauderdale has?

So you do know that we're not brand people, obviously. And so we own this thing in Fort Lauderdale, and it just is surprisingly how good it's doing, far more than our expectations. And Landry's owned a restaurant in Jupiter on the water, which was a Bubba Gump's. Before that, it was a Joe's Crab, it had been doing badly. I think they were running -- the run rate, Bob, was something like $3 million, $3.5 million.

$3.5 million, yes.

Then -- and they decided to dispose of it. The broker in Florida who is -- does a great job for us, made us aware of it. And we signed an agreement to purchase it for $250,000, subject to us redoing the lease with GE Capital. This was before GE Capital made the announcement that they were looking to get rid of all their real estate. But this was not a sale, this was just restructuring a lease. We were able to do that. The significance of the $250,000 price is even if GE were to provide us with a shell similar to what Bubba Gump's had, and it was redone from Joe's Crab, an upscale dramatically to Bubba Gump's in terms of finishes, I don't think I could build that restaurant for $4 million or $5 million. So we got an asset very, very much on the cheap. The lease is a spectacular lease because I think what GE Capital was saying was look at their sales of Rustic in Fort Lauderdale and they're on a percentage, and these guys are going to do $15 million in Fort Lauderdale. If we get an 8% percentage, we're going to do much better than the $600,000 we were getting from Bubba Gump's. And even though these guys have a minimum rent which is something like $300,000 plus some real estate taxes, we're going to wind up doing better. So out of the box, I would tell you right now, I think our breakeven is $6 million. We're probably -- if we figure $160,000 weeks, a certain number of weeks a year and $80,000 to $100,000 the rest of the year, we're at $7 million. So I think we're profitable on an annual basis. I think there'll be big swings. I think the June quarter and the September quarters will be very, very tough quarters there. And the game is how little you can lose, but you're going to lose for a few years until there's more recognition of the product and how good it is and the location. But we're definitely going to be profitable. I'm not concerned about that. And we have a total capital cost there, including the acquisition and the redo of the kitchen and other things we've done there, of about $1.3 million at this point. So it was a very cheap deal for us to see if we can extend the brand. Does that help you, Chris?

Yes, it does. That is helpful. So in terms of the -- so you expect that this is going to be a very seasonal restaurant going forward. Even as the brand gets to be better known, maybe not quite this seasonal where it's at 50% cut, but you're expecting this to be very seasonal?

Very much so. Every once in a while, and it's happened to us in the past, but it doesn't happen frequently, I wish it did, you get a restaurant that defies logical sales projections. Rustic in Fort Lauderdale was that restaurant. I mean, we had a $300,000 week last week in the middle of the offseason. So we can't expect the same thing to happen in Jupiter. Jupiter is more seasonal, and I think you're down 40% from winter sales when you get into the summer. At least, 40%.

[Operator Instructions] We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

Thank you, all, very much. See you next week -- next quarter, I mean. Thank you.