Ark Restaurants Corp. (ARKR) Q1 2017 Earnings Report, Transcript and Summary

Greetings and welcome to Ark Restaurants First Quarter 2017 Results Conference. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Bob Stewart. Thank you. Please go ahead.

Thank you, operator. Good morning and thank you for joining us on our conference call for the first fiscal quarter ended December 31, 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 on Friday 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 would 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 their operating results, performance and financial condition. I will now turn the call over to Michael.

Hi, everybody. This was a good quarter for us, primarily because we have, at this point, gotten past the waterfall of loss leases and very productive leases that we were not able to renegotiate, which were in place last year and were not in place this year. We also had a lot of activity related to the purchase and sale of the land and building the houses in Rustic Inn in Jupiter, Florida. We, as the press release indicated, purchased that under a right of first refusal cost that we had in our lease and we are able to sell it simultaneously at a $3 million profit. That complicated the way our consolidated statement of income looks. And what we tried to do, because GAAP requires that the gain on the sale be reported in this ordinary income, what we try to do is break that out for you. So restaurant operating income was $1,305,000 against $633,000 for the comparable period last year. The gain on the sale separately was $1,637,000. So, total income is represented by the addition of those two, $2,942,000. But obviously, the gain on the sale of Rustic Inn is a one-time opportunity and what you should be looking at is restaurant operating income of $1,305,000 compared to $633,000. During this same fiscal December period, we purchased the two Original Oyster Houses in Alabama. We only had those a month. They had no significant effect on our restaurant operating income for that month. So that was really not influential at all, but will be as the year goes on. Even though it was Alabama and you think it’s warm down there, their season is not [indiscernible]. All-in-all, we performed very well in Las Vegas, New York, Washington, DC and Atlantic City. Boston was down slightly as was Connecticut and Florida, Florida basically because of the storms and as well as the detour that’s still in effect at The Rustic Inn in Fort Lauderdale. If you followed us on previous calls, the bridge that takes you from the main road to our Rustic Inn in Fort Lauderdale is being repaired. That repair will be over in August and there is about a 3 mile detour and that has had a significant effect on our business in Fort Lauderdale. The rest of the business performed very well. What we are excited about is that despite onerous minimum wage legislation that we take the position unfairly gives raises to employees who are doing very well. We were able to overcome that because of very positive comp sales as well as the good job Vinny Pascal and his team are doing and trying to re-jigger how our staffs are scheduled and also our ability to gain some extra income through new charges that we are imposing on events and – when we do private events. So all-in-all, a very good quarter. We don’t think there is price elasticity on menus, but we do think there is price elasticity with private events. We started to take advantage of that in the December quarter. I hope that gives you a decent overview. And we are open to questions. Thank you. Vinny?

Thank you. [Operator Instructions] Our first question comes from the line of Bruce Geller with DGHM. Please proceed with your questions.

Hi, good morning gentlemen.

Good morning.

Hi, Bruce.

Even though you are only a month or so in, can you give a sense of how the Alabama restaurants are faring relative to your expectations? I mean, any surprises in there, positive or negative, as you look forward? And then do you have any other similar type deals in the works?

So far, the Alabama properties are performing as we expected. We would think somewhere along the lines of $2 million of EBITDA will be added by those operations. They were mature operations with long tenured management, so, things are just continuing along the way they were before. So no surprises and we are pleased with the results so far. Right now, we don’t have any other major deals like that in store. We see deals from time-to-time, which we are looking at, but nothing to report on right now.

I’d like to add with Bob. These were Alabama properties, really, really well run and will be continuing to be well run, but they are spectacular, spectacular properties. We own the land and the buildings. Again, we think the purchase price was right for us, tenured management, but these are slick operations, very well run.

Great. If I can just follow-up with another quick question, I think on the last call you said you are going to lose Sequoia in the second quarter as you do some renovations. Is that pretty much on schedule so far? And then do you have enough positive things in the works elsewhere to make up for that loss and be able to grow in the second quarter?

The answer is we are – we just completed demolition. We just started construction. We are pretty much on time. We hope to open by May 1. We have had some difficulty with the city in terms of building permits. It’s just a slow process in Washington, DC, but we think we are still on schedule. The hope there is that what we are doing attracts more events. We made it more friendly for catering and event planners. So, we think we could do more large scale events and that will drive revenue and hopefully significantly additional profit from that operation. I don’t – there is nothing we are trying to do to make up for the money that we are missing, but January, February, March going into early April, depending on weather, is not a good season for Sequoia. It’s – over half the seats are outside. So generally, we were always carrying a very big payroll and a big rent in those months. And unless we had significant events, those were losing months for us. I don’t think that the losses coming out of Sequoia being closed will be that much greater than having been open. So, we are not worried about that impacting our March quarter very much. If comp sales continue to be a wind at our back, not only will that take care of any incremental losses we may suffer at Sequoia by being close, but it will take care of the minimum wage difficulties and I think the March quarter will be just fine. We don’t see any real hurdles or headwinds in that. I hope that answers your question, Bruce.

Yes. Thank you for the update.

Thank you. [Operator Instructions] Our next question comes from the line of Jeffrey Kay, Private Investor. Please go ahead with your questions.

Good morning, gentlemen. Congratulations on nice quarter. I wanted to follow-up actually on a discussion that was had last call when an analyst or perhaps an investor broached the subject to you folks regarding what he believes is a cheap valuation and have you ever considered sale of the company. And I believe it was Michael who answered the question regarding an impediment to doing that or an obstacle of doing that was like you believe some example of the Meadowlands Casino property has some untapped upside and significant valuation should casino gaming be passed up there. And it seem like you went down the road a little bit in terms of exploring CBR or something along those lines, so I guess my question is, if you found a suitable resolution – solution, would you consider such a transaction and if you did, would it be a management led buyout or as insiders, you have so much of the shares anyway, you folks would be taking it private or would you be seeking it outside buyer, a private equity or a hospitality restaurant group?

Hi. Those are a lot of questions.

I think that I have thrown out there all at once.

Yes. That’s fine. First of all, we are really, really comfortable with our business right now. The change for our business in what we have done in the last couple of years of buying properties, whereby now over 20% of our operating income is coming from properties that we own is significant for us. Losing the regions we lost over the last few years, which were highly productive and probably $6 million worth of [indiscernible] led us to this conclusion that we had to own more stuff and we started to look at things that we had never looked at before. Obviously, we are debt at first and recently because of theses acquisitions on some debt, but that’s sort of a good governor for us because we are buying things that we think really are cheap and we are going to get a significant play out into real estate as well as the operating income following. So that’s one part of the business that we are really excited about and we are looking for more opportunities. The rest of our business has held up very, very well. And we are seeing deals. We are a company that doesn’t guarantee leases. So everything is a standalone entity, but difficult to deal with because if we are taking a lease, we wanted to be a tenant friendly lease and the rising real estate prices over the last couple of years, commercial rents, those opportunities has frequently presented to us or we don’t consider them because they are just expensive. That part of the world is changing also. Commercial rent is starting coming down. So we see ourselves with a good balance sheet, with assets that are undervalued in terms of real estate that we own. And we just like – we are very comfortable with our position. When we look at our business – and believe me, I am not saying this – I am being candid when I say this. We are not stock office, we are restaurant guys. I didn’t know what the valuation on our company should be. I just know that we are trying to build value. And – but the way I always look at this in my own way was that we have now some $25 million plus from coming from restaurant operations. We got $11 million corporate overhead, part of that’s attributable to what’s going into Meadowlands, which now is probably 2 years from something happening, but we have $25 million of corporate overhead – for restaurant operating profit and $11 million of corporate overhead. But we find the right guy to sell this to, looking at $25 million worth of restaurant operating profit, not the $40 million we expect plus – $40 million plus this year, but so I don’t know what the multiple should be on that. And I don’t know how Wall Street looks at that. But we look – if we were to sell, we would look to pair off with somebody who mirrors our locations with their locations and doesn’t need a corporate overhead. Conversely, there are companies out there that we would look at who align well venue to venue with us, where we don’t need their overhead. We tried that ones. We are not successful in making that acquisition, but we think our balance sheet and the business we are running now has a very favorable trend. We are not looking to sell our business. We get once every three months, four months good investment banker that’s how you should take in this private. The problem with that is I don’t want to be talking to a subordinated lender which needs one day and have to look at refinancing what are on doing, what we did. So I think you got to be patient with us and say hey you just got, it’s going to build a very strong business going forward. They are watershed of old leases is behind them. I think I described last 5 years or 6 years being one of these acrobats with the bamboo sticks, spinning plates on the sticks and you get down number 17 and watch number 1, 2 and 3. That’s what’s happening here. We have been hugely successful in finding operating income from either leases we have done, like Robert or Southwest Porch or acquisitions we have done like Rustic and Shuckers, hugely successful. But the problem is we have been chasing lost EBITDA. That lost EBITDA is one we lost anymore. Our lease is in good shape. We own significant number of properties. So I think we are in a position to build and that’s very exciting for us, very exciting. And we will see deals. Now, we don’t have a real estate department here to deal started to come with us and whether it’s one, two a year, now, there will be deals that will be done that I think we will be excited about. But you just have to have some patience with us. We are not sellers.

Thank you.

[Operator Instructions] Our next question comes from the line of Jeffrey Matthews with Ram Partners. Please proceed with your question.

Hi, thanks very much. Can you hear me?

Yes, very much.

Just a follow-up on a comment you made in response to that last question, I am not sure exactly what you said, but it was something about commercial real estate weakening or softening or something, could you elaborate on that a bit? Thank you.

Yes. We look at – let me start over. I am sorry. We look at primarily New York real estate, because we are a New York based company. And we compare that to what’s going on in the rest of the world. So we didn’t do a deal in Tampa a couple of years ago for a 10,000 square foot restaurant that was the lease is for sale by a developer who had taken back the restaurant. And we are looking at a 500-seat restaurant on the water with a lot of outdoor space, we need a couple of million dollars to bring into good shape and the rent is $25 a foot. And I could do as much business there if I was able to get that lease and the problem was developers eventually sold the property while we were still in negotiations with them. So we didn’t get that lease. But you have this disparity around the rest of the country where there are wonderful leases available for operators, again if you can find them, but they are there. And in New York, you are paying $250 a foot. And if you can do business out of town, you are in a position to get a better return on capital obviously and management can’t. The differential was so great that if you walk through Manhattan, the number of empty stores right now are overwhelming and landlords are starting to say, hey, the only deals being done in New York, if you talk to brokers are basically food deals. Large retailers aren’t moving in. And in many cases, they are moving out. So we think that, at least in New York, rents are dropping. And in the rest of the country, they are kind of stable and not going up and that gives us an opportunity to negotiate a better deal. And we will find them. We will find them. So, we are told by brokers and we have our own source of information, because we talk to a lot of landlords and developers as well, that are coming at us with deals that are kind of exciting in terms of their potential to draft a very strong tenant lease. That was unavailable to us 6 months ago or 8 months ago. This is a process that’s just starting. So, we see that as a huge opportunity for us.

Understood. Thanks very much and thank you very much for hosting the call. They are just unusually informative in a worthwhile. So, we appreciate that.

Well, thank you. That’s very nice to hear. I appreciate it.

Thank you. And it seems we have no further questions at this time. Let’s turn the floor back to Michael Weinstein for closing comments.

Alright. I think we have said everything. We look forward to hearing you from you next quarter, hopefully, onward and upward and we appreciate your interest. Have a good day. Happy Valentine’s Day.

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.