Ark Restaurants Corp. (ARKR) Q3 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to Ark Restaurants Third Quarter 2016 Results. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Bob Stewart, President and Chief Financial Officer for Ark Restaurants. Thank you, Mr. Stewart. You may begin.

Good morning, and thank you for joining us on our conference call for the third fiscal quarter ended July 2, 2016. With me on the call today is Michael Weinstein, our Chairman and CEO; 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 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 be -- have a direct bearing on our operating results, performance and financial condition. I will now turn the call over to Michael.

Hi. I'm going to do my best to try to explain the quarter, but there are some overriding themes, which I think are important. First of all, we're -- on the businesses that are operating, we feel pretty comfortable that we're doing a good job, the product is good. The sensitivity to prices is obvious from the review of the quarter. Last quarter, in response to minimum wage increases throughout all our menus, we started to raise prices not significantly, 1%, 2%, 3%, depending upon the restaurant's location and what we thought demand was for our product. I think we're fully priced. I think there is a little bit of pushback in some areas with the pricing. The big issue going forward to this company, and I think most restaurant companies, will be the acceleration of further minimum wage increases, especially for tipped employees. I don't know if there's any price elasticity left out there right now to sort of compensate to those increased expenses. Our EBITDA was improved this last quarter by 2 adjustments. I'm going to interrupt my part of the discussion right now and give you back to Bob Stewart, who will explain those 2 adjustments. He had a large part in us being very successful in Florida to recapture rent taxes that we did not think we should pay. And it was an ongoing litigation for some 5 to 6 years, which we have now been successful with. So Bob, why don't you explain the 2 adjustments that positively impacted our EBITDA in the quarter and the year?

Well, as Michael said, the rent tax case in Florida was the larger adjustment of about $945,000. We had been in court with the state of Florida for, I think, 5 years. The Tribe -- the Seminole Tribe had taken the state of Florida to Federal Court. The state of Florida lost in Federal Court of Appeal, lost again. And that sort of was the reason why they were willing to sign consent judgments with us indicating that they are constitutionally prohibited from taxing the rentals on tribal land. So that impact was $945,000.

Gross.

Gross. There was a part of that, that related to noncontrolling interests. The net income effect of that was positive $449,000. The other adjustment we made related to an over-accrual of percentage rent on one of our properties. It wasn't material in any of the quarters that the accruals were occurring. So it was adjusted in this quarter and the net effect of that was $191,000 on the bottom line. So those were 2 fairly large adjustments that occurred this quarter.

So without those adjustments, the change in EBITDA would have been -- on a quarter-to-quarter basis would have been negative $417,000. There is some ongoing positive effect of the case in Florida at the Hard Rock, which is on tribal lands. In that, we -- this accrual, which we took back, obviously, was over 5 years we were accruing in case we lost at the state level. But now we will not be accruing, so EBITDA on a quarterly basis will improve somewhat on the Hard Rock properties, both in Tampa and Hollywood. The other things that really affected the EBITDA in this quarter are primarily, on the positive side, our opening of Southwest Porch, which is just doing gangbusters. But on the negative side, we lost the Center Café in the quarter, which is in Union Station in Washington, and that had been a very profitable endeavor for us. So we lost that EBITDA. In -- at the Rustic Inn in Fort Lauderdale, we lost considerable sales. There is a detour to get to the property now. The bridge that took you over the canal, that was a direct way of getting there, has been torn down and they're replacing it. We probably have another 12 months until the new bridge is up. And right now, there's about a 3, 3.5-mile detour, and we think that is hurting us dramatically. We acquired Shuckers in Jensen Beach, we did not have it last year. That has had a positive impact on EBITDA. And then the last thing that has been difficult for us is Las Vegas, where we lost the V Bar. We had that last year. We did not have it this year, and that's significant operating income that we lost. So all in all, if you remove the adjustments of the accrued rent and the Florida tax, it all nets out to where we were down $417,000. On the same-store sales side, the big impact is Florida and our properties at the Rustic and also Rustic Jupiter, where we had road construction in kind of the place. We've been living with construction in several restaurants for the longest time. So it's hard to say when these results are somewhat down, but we like our business. We feel that we're doing a good job. We feel customer response is excellent. Demand is down where it should be down, where we have construction. Where we don't have construction or -- and where we're operating, we're basically flat to up a little bit. Again, the larger themes for the company are, I think, no price elasticity at this point and upcoming increases in minimum wages. Those are going to be the 2 issues. We are continually looking for new properties. We think we will secure some new properties before the end of the calendar year. The balance sheet is very, very strong. We have more cash than we have outstanding long-term debt. We are in a position to act on favorable business deals when they come across our desk. Any more questions -- any questions, I'll be happy to take them.

[Operator Instructions] Our first question comes from the line of Bruce Geller from DGHM Funds.

Can you go through the comps by market, by geography?

Yes. Las Vegas, we were down 0.3%. So on $11 million business, that was $37,000. New York, we're up 1.5%; Washington DC, we're absolutely flat; Atlantic City, we're up 6.9%; Connecticut, we're up 4.3%; Boston, we're down 11%; and Florida, we're down 11%.

And you said that you think the impact on Florida has got about another 12 months from that construction?

Yes. The Department of Transportation down there, I met with 13 people at the last meeting. They had their act together, and I'm pretty sure when they say the time period, which would be about this time next year the bridge will be open, I'm pretty much convinced that they're going to deliver on time.

[Operator Instructions] Gentlemen, there are no other -- we do have another question coming from the line of Bruce Geller.

Could you remind us when you lost Center Café and V Bar? When those started to exit the numbers? And when that will annualize out?

We lost V Bar at the end of last calendar year, December, and we lost Center Café around March.

Okay. So as you start to look into next fiscal year, can you kind of give a framework for how you see things playing out next year?

Again, I think we will have additive EBITDA from Shuckers and Southwest Porch. We will not have anything that falls off. Am I right, Bob?

Correct.

We have no leases coming up for a few years. We will have an interruption in sales, but not so much in EBITDA from our construction in Sequoia in Washington, D.C., which we're going to close on January 1, and hopefully open by April -- mid-April of next year. So that will be an interruption. Our new lease, which is a favorable lease, by the way, in Washington, which becomes due in November of next year, we made a deal with a new landlord, a Korean REIT. And part of the deal, to retain a favorable rental, a new 15-year rental period, was to redo the restaurant. So that'll take us 3.5, 4 months, and that's going to be a significant CapEx expense. But given the direction of sales we're going in and the popularity of Washington Harbor, which is the venue the restaurant is located in, we think that a redo -- and it's a 25-year-old restaurant -- was appropriate and will be a good investment for us. But other than that, nothing is closing. We like our business. We really like what we have. The only thing that's losing money is Jupiter, Rustic, which made a big improvement this year in bottom line. The efficiencies are much better than they were in the first year. We think the profit is much better. We finally have good management down there. And we're happy with our business.

Do you expect Jupiter to return positive next year?

If it doesn't, it will be close. It's moving in the right direction.

You have the ability with your lease to just close the restaurant?

In where? In Jupiter?

Yes.

Yes, we can walk away with it. We have no corporate guarantees on any lease we have here. We have had 2 offers. And we maybe -- you never know if an offer is real. I think one was probably real -- to buy the restaurant, and we're feeling confident enough and our lease is a strong enough lease that we're not giving up on this thing. So -- but I think if we can't make significant improvements in the next year, 1.5 years, we would consider selling it.

And then can you just give an update on what you're seeing with respect to the Meadowlands? And what kind of marketing or advertising-related costs you may have upcoming related to that?

I'm happy to. I was going to give you an update in my closing remarks. So it's very hard -- just for background for everybody, a referendum is on the ballot in November to allow for casino gaming as long as the -- and the issuance of 2 licenses for casinos 72 miles away from Atlantic City. The site that everybody seems to be most interested in, although it is not named in the referendum, that's part of an RFP proposal that will be put in front of some government-appointed board for approval. The site that everybody seems to think is the best site is the racetrack in Meadowlands, which is in Secaucus New Jersey, and we are an 11.6% owner of the company that owns -- the limited partnership that owns the Meadowlands Racetrack. We are not a general partner, we are a limited partner. In addition to being a limited partner in the ownership, we have an exclusive on all food and beverage in the casino is built there. Right now, under a management agreement, which has no effect on the P&Ls in Ark -- we run it, I guess, pro bono. We run the food and beverage at the racetrack right now. The legislation requires that whoever gets a license must have, as a partner, a casino license holder in Atlantic City. That limits the field dramatically and the strongest candidate would be MGM. MGM has had discussions with us. They are not going anywhere now. They don't have to go anywhere from MGM's point of view because they can sit back and wait until the referendum passes, or it doesn't pass, to make a decision whether or not they want a partnership. And it's mandated that they have at least 50% ownership, not MGM, but any casino operator in Atlantic City that's chosen to do this project for 1 of the 2 licenses. So the 2 licenses, we think, one will be issued if the referendum is successful, one would be issued to the Meadowlands, and we think one will be issued in Jersey City where Paul Fireman, the former owner of Reebok, has staked out some property that he thinks would be a good location. There's a lot of politics swirling around it; it changes every day. Right now, there is an opposition group that's starting to show up with television ads and newspaper ads called Bad Bet, New Jersey. That's being funded by Genting, who owns and operates the Aqueduct Racetrack in New York. And it's being funded, we know, by Penn Gaming, who has gaming interests in Pennsylvania. We're not sure whether the Venetian, who also has gaming interest in this. They're just a part of that group. But that's going to be a well-heeled group, and I think you'll see extensive opposition ad campaign from them. We have, on our side, a commitment for a $10 million social media campaign that had started on August 3, and it is just getting underway to take us through September, at which point, we'll do more polling. When I say we, the group that's part of the limited partnership will do new polling and try to figure out what the capital requirements are to take the campaign -- a positive campaign -- from September -- the end of September into the November election. We did not put up any money in terms of the $10 million campaign. That's being loaned by our other partners. In the past, we have loaned $1.7 million to the project because we required design changes and took out another food operator -- would have had another food operator -- and we put up $1.7 million. So essentially, we've overfunded in terms of our debt -- or our loan because there were no other loans up until this point. So the $10 million, our $1.7 million represents a greater portion than our 11.6%, so we didn't have to fund any part of this campaign. My guess is from conversations we've had amongst ourselves -- I mean, there are weekly conversations going on -- that there will be a requirement for a minimum of another $10 million to $15 million. And it is sort of understood that we're the small player in this thing, and we will not be participating in any further loans in terms of the marketing of the positive campaign to try to get the referendum passed. So I don't think, at this point, anybody is expecting us to put up any money. Bruce, it's very hard. There's new information coming every day. It's very hard to figure out where the politics is. The sports betting issue comes into play now as well. The strongest argument for the casino is the state is broke, desperately needs money. Taj Mahal closed. It had nothing to do with a casino in the north. Everything that is bad about Atlantic City is the competition coming from Maryland, Delaware, Pennsylvania and New York. A casino in this lot is not going to make anything materially worse. It's already terrible. It's a smaller field now, they'll be down to 4 casinos when Taj closes. Those casinos should -- are now operating cash flow positive from my understanding, all-in. They'll continue to be cash flow positive. Atlantic City is a disgrace. The casinos had operated for years there, did not put any money into the city. You walk down there, it's scary looking. This referendum will put money -- significant money from the tax the state charges back into Atlantic City to improve the infrastructure and clean up the city. So there are very positive arguments for it: Jobs, probably $400 million a year going to the state from the tax -- which they haven't clarified by the way, but that's the best guesstimate that we have so far. I think there's a positive case to be made. Whether the negative case or the positive case will even be heard by the voter in this election year is also questionable. How you get through all of this noise from the presidential election. So I can't even give you an estimate. MGM came out with a strange press release a couple of days ago, where they talked about Jersey and their wait and see attitude. And basically, they thought it was close and maybe a little bit against the passage of the referendum, but they thought it was close, and they'll do more polling as well come September, October and see what moves they want to make, if any. I don't think Caesars is a player. I think the strongest opponent of the Atlantic City group of casino license owners is probably resorts. Morris Bailey owns resorts. He doesn't want to see a casino in the North. I don't know how much he's contributing to Bad Bet. We have -- we're operating 2 restaurants and resorts. We're doing great there. We're up 6%, 7% in sales over last year. And who would've thought in a dying community that we would be operating successfully? So I really don't have anything to predict other than I think it's going to be messy from the political side. I think there's a lot of noise that the voters are going to have to work their way through to even get to the referendum and the facts about the referendum. The other thing that's probably beneficial is there are only 2 referendums on the ballot. This and another referendum are going to be the things that stick out. My guess -- and I said this to Jeff Karalus, my partner -- I think no matter what you do, somebody walks into that voting booth and they're going to not know what they're checking off. That's my guess. So I think it's all by chance. That's my answer, Bruce.

[Operator Instructions] Gentlemen, there are no further questions in the queue. I'd like to hand the call back over to you for closing comments.

Well, thank you, all. Again, we're very happy with our business. It's a strong business where we are aggressively looking to expand it, find deals which are appropriate for us. And I thank you for being on the call. We'll see you in 3 months.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.