Ark Restaurants Corp. (ARKR) Q2 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to Ark Restaurants' Second Quarter 2016 Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today's call, Mr. Bob Stewart, President and Chief Financial Officer. You may begin.

Thank you, operator. Good morning, and thank you for joining us on our conference call for the second fiscal quarter ended April 2, 2016. With me on the call today is Michael Weinstein, our Chairman and CEO. For those of you who have not yet obtained a copy of our press release, it was issued over the news wire 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, everybody. Briefly, I would like to review some statements we made in the last quarter, just to remind you. The issues that we have faced in the company, and which I think we're handling very well, are twofold. Number one, we are churning leases. By that I mean we have lost some leases that were valuable to us. New leases or new acquisitions of properties have more than made up for that. I think we replaced a lot of lost EBITDA over the last couple of years. And at the present time, we have nothing that really is in danger of imminently terming out in terms of our leases. So we are in a much more stable position than we have been in the last 3 years. Secondly, our approach to minimum wage increases, which were most dramatic in the New York City region, where we have significant revenues. We are finding that we have price elasticity. Our managers are working really hard to try to limit overtime hours. Another part of the labor law are something called spread of hours, where somebody works 9 hours and are paid the 10th hour even if they don't work it. New York City has implemented 6 mandatory sick days for all employees. So the impact on our tipped employee payrolls has probably been a 50% increase in wages that we pay to them because we don't get credit for the tips that they're earning toward minimum wage. So this has been a dramatic amount of money for us. So again, we've been rescheduling people, taking some chances with some service coordination, how we get the food in, store it, prep it, cook it and serve it. We've been trying to invent some new approaches. But what we have found for the moment, and we're certainly not going to price at the end of the line, is that the slight increases in menus -- menu price items that we've implemented have been easily accepted, and we probably have a little bit more elasticity to make up for these wage increases than we originally thought. So that prospect is heartening. If I go through the various regions. Las Vegas, we were down in comp sales for the 13 weeks 1.6%. That is largely due to construction at New York, New York. In mid-April, they opened up the park next to the hotel. That's a big deal for them. It has a 20,000-seat arena. They're continuing construction. They're building 2 7,000-seat theaters. There are more restaurants out there, but I think in the end we will benefit from the pull from the -- from these theaters and the arena. In New York, our business is very strong. We're up 14%. That does not include Southwest, which is our new open-air bar/restaurant in Bryant Park. It's our third operation in Bryant Park. Those sales are very, very strong. But we weren't open last year at this time, so there is no comparison. But New York is really, really doing well. Washington, D.C. is doing very well. We lost a couple of operations to leases that termed out over the last couple of years. Sequoia, which is on the Potomac River and is a 1,000-seat restaurant, seems to have built a substantial new demand. Our catering business there is also very strong. Atlantic City, we're up slightly. That amazes me. Atlantic City, as a casino town, has been in a downward spiral. Somehow we managed to move ahead over the year. Boston, we are up 13% at Durgin-Park. It's our only operation up there. Connecticut, we're roughly flat. We operate some small places in the Foxwoods casino, not really material. And Florida. Florida, we have 5 operations. We have -- we manage and operate the fast-food courts at the 2 Hard Rock casinos in Tampa and Hollywood. Our business there has -- had been down substantially over the last 2 years as Hard Rock implemented new marketing systems on comps and incentive dining. Basically, they do not allow incentive dining and comps to go into the food courts anymore. That hurt our sales dramatically. We are now sort of stable with those sales. I do not expect they're going to reinstitute comps, so we've been down in sales there for the last 2 years. We also own The Rustic Inn in Fort Lauderdale, which we acquired about 2.5 years ago. That does extremely well. We're having a slight downward year this year in terms of revenue, and I think it's largely impacted by the fact that there is a detour to get to our restaurant. The bridge that takes you over the canal that leads to our restaurant was determined to be unsafe. They're building a new bridge. In order to get to the restaurant, now there's a 3-mile detour. I think that is impacting us, but we're still doing a lot of business. We acquired Shuckers in Jensen Beach. That is not in our comps. We were not operating it last year, but that is very strong business for us. And we're very gratified with the transition from the previous owner to us. We kept all the management. It's been really a seamless transition, and the restaurant is performing well. Jupiter, we own Rustic Inn, which we opened last February, so that's really not in our comps to any great degree. We are doing better there in terms of -- we're losing less. We have not yet figured out -- we're running smoothly. I think the payroll is in line. Food costs are a little higher than we would like to be. We've not yet figured out the market and how to get more people in there. I think the sales picture is improving. I had been too optimistic a couple of quarters ago when I thought we'd make a profit this year. We will not. Last big item is the Meadowlands racetrack. We own 11.6% interest in the Meadowlands racetrack. It's a limited partnership. A gentleman -- by the name of Jeff Gural is the general partner. We are partners with him. Hard Rock Casino owns about 20% of the limited partnership, and other investors are in it. But we're the -- right now, we're the third-largest investor. There is a hedge fund up in Canada named Clairvest, who loaned some money, and they can convert into common -- into limited partnership interest. If they did so, that would make us the fourth-largest partner in that. We made this investment some 3.5 years ago with the hopes that Jersey would legislate to change its constitution to allow for casino gaming in the northern part of the state. On March 16 of this year, New Jersey legislatures did just that. They are allowing a referendum to go on ballot in November, which will, again, allow for casino gaming in the north of the state. The specific locations where they will allow it -- they're allowing 2 licenses. The specific locations are not named in the legislation. Also, not named yet in the legislation is a tax rate. And while it's anticipated that a big hunk of the revenue -- tax revenue generated from the casino would go to Atlantic City for refreshing the city and trying to structurally make it into a destination resort. That hasn't been specified in the legislation either. So the referendum will be voted on in November at the general election. We are starting a marketing program, the entity, to try to help explain to New Jersey voters why this is a good thing and they should approve it. Polling has been pretty close right now. We think it should pass, but by no means is there a strong polling resource that says it will pass. The polling has been pretty much 50-50. There are 3 polls that have been taken. The papers in the north of the state, editorially, are very much in favor, and the state needs revenue. It's projected that this could give the state as much as $400 million a year of revenue. Obviously, if this happened, we would not only own a piece of the casino, we would be diluted by the additional money needed to build it. But we have an exclusive on all restaurants and all food service, with the exception of a Hard Rock Cafe, if a Hard Rock Cafe would be built. So that could be significant revenue for us as well. One of the factors in the legislation is that you must have an Atlantic City casino license to operate in the northern part of the state, if it's approved. So we would have to partner up with a casino that presently has a casino license in the North. Hard Rock does not have that. So Hard Rock is well aware of the fact that they may not be operating this or they may have a Hard Rock under the umbrella of another casino operator. That's pretty much it for me. I think you have a good sense. Our cash position is good. We haven't taken on any more debt. Our balance sheet is very strong. We expect to have a very good June quarter. At least we're set up for it. Weather does affect us. Let's have some questions, please.

[Operator Instructions] The first question comes from Bruce Geller with DGHM funds.

The comps for the quarter were listed in the press release at plus 1%. But some of the numbers that you gave are -- confused the matter for me because you noted New York was up 14%, which is -- that's a big driver of your business. That's such an important part. It was up 14%. How could the overall comps have only been up 1%?

Yes. Florida was down 9.3%. I'm sorry, I didn't mention that. I mentioned the construction and the marketing things and the change in marketing of the 2 Hard Rock casinos. But it was down 9.3%, I think, yes. So if New York was up $800,000 in sales, Florida was down $669,000.

Okay. Do you think that Florida will remain down at levels that substantial for the rest of the year? Or is there something in place that you've seen ...

Florida is going to track this from now on in -- at pretty much the same range as it is now. We -- so we see no reason for sales -- other than if we could pass on price increases at the fast-food courts, for sales to go up in the coming year. They will not go down anymore because they've taken all the marketing incentives away from the fast food area, so those are gone. They're not coming back. What will happen probably in 18 months, which is -- hard to predict what the impact will be, but Hard Rock is building a new hotel and expanding their entertainment center in Hollywood. There's a similar plan which is a little further behind the Hollywood plan in terms of getting it built, but there is similar plan for Tampa. There are making these things bigger. We have the exclusive fast-food areas in both, so we would think we would benefit eventually from that expansion. But right now, our sales is going to be remaining pretty much on track to the way they've been the last couple of quarters.

And it sounds like you're a little bit less enthusiastic about the Jupiter restaurant at this point in time.

Well, it hasn't produced the sales we thought it would. We're enthusiastic, honestly, about the way we're operating it. I think the product is really, really good. We pay attention to OpenTable reviews. We don't really pay attention to Yelp reviews. There's no way to know if somebody writing the Yelp review really ate there. But with OpenTable, we know the customer was there. And our managers and waiters are talking to customers all the time, and we're getting very good response, really great responses -- I shouldn't say very good, great responses. The business seems to be building a little bit, but it's slower than we anticipated. We're very happy with the product. We're not happy with the sales level.

So you've had a lot of moving pieces through the first half of the year. Can you give kind of a directional outlook for the second half of the year, taking into account the ...

Well, we think certain things are very, very strong. Our New York business is extremely strong. There seems to be great demand for what we're doing. And -- we didn't put big price increases in at the beginning of the year because we just -- as I said, we're concerned about elasticity. We don't want to price at the end of the line. But nobody is talking about price. I mean, you think of restaurants -- I'm old, so when I started in this business, if you made the list of the top 50 restaurants in the country 25 years ago, you were probably doing $5 million. Bryant Park did $175,000 yesterday. Yesterday, okay? So I mean that's an enormous number. I don't have the number for Southwest Porch, but it's an all-outdoor, little bar, hamburger place that sits at the southwest corner of Bryant Park. They did $26,000 yesterday. It's an extraordinary number. So I think we have some elasticity there, but the most important thing in New York, our business is extremely strong. In Las Vegas, we think we'll start to get a bump -- we hope we get a bump from the fact that this construction has been lifted that blocked one of the main entrances to the hotel for a couple of years and was unsightly. That's all been lifted. And hopefully, we get new demand from these entertainment centers they're building. In Washington, D.C., Sequoia is very strong. Now in Washington, we have 600 outdoor seats. In New York, we have maybe 1,500 outdoor seats. So obviously, weather affects that also. But if you ask me about demand in Las Vegas, New York and Washington, D.C., it's definitely there. If we get just a normal weather pattern here, we should certainly outperform last year, maybe by a lot. And certainly, Southwest is going to contribute. The Rustic, maybe down a little bit in EBITDA for the rest of the year because of the construction there, but certainly Shuckers is going to contribute a great deal. And so we think we're set up in a rather good way right now. We like our inventory. Jupiter is the only thing that is lagging. Clyde's is really coming into its own. We're way ahead of that in there from last year's EBITDA in New York. So I think the year should be a good year. Yes, that's my comment. I -- we don't have -- we're sort of marching in place here, waiting to see what happens in November. We haven't seen any deals that we want to do. We're not seeing a lot of deals. We have a lot of discussions. But when I say we're not seeing a lot of deals, they're all too expensive, whether it's a lease, that's too expensive, or business to buy that may be a good business but is too expensive. It's hard to find stuff. But our lease positions are really rather good right now, and our business is good. So that's as much as I can say about it.

So when you put it all together for the second half of the year, do you feel like ...

We should be ahead of last year.

Okay. Well, that's good. Is there going to be an incremental spend for marketing on that vote that you noted in November? You mentioned you're going to have to spend something on that.

The other potential site, which is a Jersey City site, which is being advocated by Paul Fearston (sic) [ Paul Fireman ] who used to own Reebok, there is a conversation going on with him, with Hard Rock right now, with the hedge fund in Canada on what the marketing budget should be. Whether or not Fearston (sic) [ Fireman ] wants to be a part of it, he has indicated he does. So there may be an incremental spend, but we have -- we don't think our share will be anything substantial. And when will say -- I would take a guess, our share would be in the hundreds of thousands, certainly not $1 million. So that's where I think we are.

And does the fact that you would now have to partner with a casino company from Atlantic City, does that take away some of the potential upside if the vote does pass?

Everything takes away from the potential upside. Clairvest, the hedge fund in Canada, would be -- if they make the investment they're allowed to make it, it would be dilutive. And obviously, the legislation, which calls for an Atlantic City operator to be a partner, that's dilutive. But the fact of the matter is, in order to keep our percentage before the legislation call for an Atlantic City operator, we would have had to dilute ourselves one way or the other ourselves by either selling additional equity to finance this thing, hopefully, at a price that was higher. Because I think once the legislation -- what surprised me is March 16 was a date we didn't think would come for another 2 years. We were surprised at how fast circumstances created an environment where the legislation could be passed. I mean we made this investment, and in 1 year, 4 casinos closed in Atlantic City. We didn't expect that. We're not that smart. And revenue from Atlantic City continues to go down. So the -- and then we did not expect that Caesars would upset legislators by making a bid for 1 of the New York licenses, 1 of those 7 licenses. I mean that was like the legislators saying, "Caesars, here we are trying to protect Atlantic City from competition. We can't protect you from Maryland, Delaware and Pennsylvania. But we will certainly try and protect you from having casinos in the northern part of the state, which is perfectly logical to do in order to recapture revenue that's leaving the state. And you guys go ahead and bid on a license outside of the state. What are you doing?" So I think that turns a couple of heads. We contradict that. So the legislation took place in an environment that we didn't think would be there as quickly as it came. The -- under any circumstances, no matter what we own of this thing, it is a big, big upside. I -- if it occurs -- I thought March 16, when that legislation passes, somebody would -- I'm not a stock guy, I'm a restaurant guy, but given a fairly stable balance sheet and decent earnings, it's certainly not a runaway growth company, but paying a 5% -- I thought the stock would take a little bump. No one seems to care.

Right. I guess it's so hard to handicap this vote pass thing with all the variables and then trying to figure out what your -- basically, what your option might be worth.

Yes. So nobody's pricing in an option. It's not really an option because either it goes or it doesn't go. But you would think that somebody would say, "Hey, this potential should be priced into the stock." The stock went down 4 points on March 16 -- since March 16, or 3 points or something like that. One of the ways we are in a better position than everybody else is exclusive on the restaurants and bar service and all food service. I think this casino, if it happens, makes a great amount of money. And whatever percentage we have, it will be -- it will turn out to be a very strong investment in terms of returns. But the restaurants, regardless of whether the casino makes a lot of money or a modest amount of money, those restaurants are going to hum, and there's a big play for us there as well. So if it happens, I think we're looking at a completely different business model in terms of the cash flow that we will have available to grow our business in the future.

[Operator Instructions] There are no questions at this time. At this point, I'd like to turn the call back over to Michael Weinstein for closing comments.

Well, thank you very much. We'll speak to you next quarter, and enjoy your summer.

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