Ark Restaurants Corp. (ARKR) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to Ark Restaurants' First Quarter 2018 Results Conference Call. [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. Please go ahead, Mr. Stewart.

Okay. Thank you, operator. Good morning and thank you for joining us on our conference call for the first fiscal quarter ended December 30, 2017. 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 have a direct bearing on our operating results, performance and financial condition. I’ll now turn the call over to Michael.

Hi, everybody. One of the big factors in this December quarter was the fact that this year, New Year’s Eve fell into our March quarter of fiscal 2016, when last year, it fell in the December quarter. It’s hard to quantify what that cost us in terms of EBITDA but in a way, that might be helpful. For the 6 weeks ending February of this year compared to last year, we’re up excluding sales in Sequoia. But away from Sequoia, we’re up about $1.1 million in sales. We’re not up $1.1 million in ordinary business, it’s just the flow of New Year’s Eve into the present 6 weeks that’s impacting that number on the upside. We’re still up in comp sales but not by that much. And so the influence of having that 1-day switch of New Year’s Eve impacted EBITDA. Again, it’s not quite quantifiable but it was a big factor. Generally, in that quarter, the December quarter just reported, one of the big influences again was Sequoia. You almost have a look at Sequoia as a startup. We’re carrying way too much payroll as we train people in the December quarter. That has come down now. But the September, October, November, December periods, we’re doing a lot of training. What is gratifying is that Sequoia over the December quarter compared to the prior December quarter was up 13.7% in sales. So the P&L might not look this good but the top line is looking very good. And we’ve always been good at getting the equation right, in getting all the elements of running an operation of this size in line. So we’re very encouraged by the sales. And the second thing about being up 13.7% is that since Sequoia did not open until late summer, we had a difficult time selling for fall and winter events, private events, because people couldn’t see the place finished. So we sort of missed that season. So the regular business is what’s really up dramatically. And we’re sure the event business with the additional event space that we created within the facility will rise as well. The other encouraging thing about this is that as our sales force got people to come into the place once it was finished, the ratio of people who visit and book is extremely, extremely high. I’m told it’s like 88% of the people that come visit with the idea of doing an event there are booking. So we seem to be getting on the right path here with what we’ve built, the look of the place, the additional event space, the fact that comp sales are up 13% for this – the January, February period-to-date. So we think that’s very healthy. The other part of our business that is extremely strong is Las Vegas right now. We’re – for the December – for the six weeks ending February, we’re up 19% in Las Vegas. Again, part of that is the flow of New Year’s Eve, which is a big day in Vegas. But we’re up dramatically and one of the reasons for that is hockey has come to Vegas. The venue is right within the New York-New York park that borders on the New York-New York Hotel. So we’re seeing tremendous traffic every time they have a hockey game. That’s a new element. In addition to which Vegas, I’m told, has the best economy in the United States right now. Business trip is up, spending is strong. So Las Vegas has been a pleasant surprise. One of the other things there is as we grew volume, we become more efficient both in terms of payroll and cost of goods sold. So margins are benefiting from that as well. We spoke last time about Rustic Inn and the detour and how we were waiting for this bridge to be finished to avoid a three-mile detour to get to the place. The bridge was finished in late December. What we’re seeing is a dramatic pickup in sales. Again, for the 13 weeks, we were up anyway by 8%. But now that number has expanded to where we’re up about 10% from comp sales last year. We think we will recover that missing EBITDA that we had prior to the bridge being taken down. Again, that missing EBITDA was about $700,000. It seems to me if we can keep this 10% gain in comp sales that we’ll recapture the total of that $700,000. So we’re pleased about that. New York remains fairly strong. We have one restaurant in Boston that has struggled the last few years. It continues to struggle. The Alabama properties are doing what they’re supposed to be doing pretty much. For the 12-week period, we were up about 7% in comp sales for the December quarter. We’re about flat for the first six weeks of February. Alabama. When you think of Alabama and the Gulf Coast, you think the seasonality should not be as big of a factor. But these two highly seasonal restaurants, they start to get going in late March, early April so we sort of skewed everything toward the summer months, where the cash comp really starts to work for us. But overall, business is solid. We think we’re on the path that we explained in the last quarter which we’ll – where we gave guidance of $14 million-plus in EBITDA. We don’t see anything interrupting that right now. If anything, if Vegas keeps going the way it’s going, we may be a little bit stronger than that. Sequoia still remains to be seen until we get into the summer months and see what the new configuration really can do. But we are comfortable that we’re going to at least recapture our old EBITDA and capital allocation would have been a problem if we don’t go beyond that. So I hope that gives you an idea of what’s going on here. We’re very, very comfortable with our business at this point. And I’ll take questions if there are any.

[Operator Instructions] And gentlemen, we have no – and we have a question from the line of Robert Meador, a Private Investor.

Do you have properties in Atlantic City? And if so, how are those doing?

Well, we do have properties in the Atlantic City? We have Gallagher’s at Resorts. And across the hall from Gallagher’s, we have a burger bar. And we also have a burger bar in – Broadway Burger Bar at the Tropicana in Atlantic City. Those properties have been pretty good for us the last few years. Although in the quarter that we just reported, we were down about 4% in comp sales which represents some $66,000 differential from the prior year. That probably was affected by New Year’s. So I don’t think we’re really down. The Resorts property is probably going to benefit from the new Hard Rock property because it’s sort of a pathway from one to the other. And based upon if the new Hard Rock property, which is the old Taj Mahal property, and I toured that recently, if that becomes successful, they don’t really have enough capacity for food and beverage at the Taj Mahal. And when old Taj was open, we used to benefit from the fact that they were under-restaurant-ed at the old Taj. So hopefully, the Resorts property will benefit from the opening of the Hard Rock. The Tropicana property has been just fine. It’s not a home run, it’s a double. It just sort of does the same thing year in and year out. It’s run really well. It’s contributed a nice amount of operating profit. Nothing special about Atlantic City obviously in terms of the whole town. It’s struggling. Casinos are down to, I think, seven operating casinos. With Hard Rock, it will be eight. But again, you have Philadelphia building a new casino. And that might impact all of Atlantic City. But we’re fine, just doing fine.

Alright, thank you.

Well, thank you.

We have another question coming from the line of Jeffrey Kaminski with Family Office Consulting.

Hi. Good morning, gentlemen congratulations on a nice quarter. Just a question for you as a long-time shareholder, I know that you instituted a corporate buyback years ago as a safety net to be, for example, it’s not particularly liquid stock and that’s – how do you, a, plan to institute that buyback? Or perhaps pay a special dividend or something to reward shareholders? I was curious as to what’s

So part of the question came out garbled. But let me answer what I think I heard. The stock buyback that we put in place – first of all, we have bought back some 300,000 shares, 250,000 to 300,000 shares a few years ago from a deceased shareholder. That was when the stock was about $10, $11 a share. But that’s three, four years ago, maybe as much as five. When we made our purchase of our limited partnership position at the Meadowlands, it occurred to us sometime after that as we were becoming more confident that the likelihood of a casino license being issued to the northern part of New Jersey by the legislature, as we contain more confident, we said to ourselves, nobody is paying attention to what value of this could be. And it may be at some point that a license is issued and it becomes a yawn and nobody is really aware of how much additionally we thought could be sitting out there for us. And we said, let’s institute a shareholders' buyback with that in mind. That was done about 8 or 9 months for a referendum that was passed by the state legislature in New Jersey in 2016, which eventually failed. So given that it failed and that EBITDA is postponed for another day, the potential for that EBITDA until it gets back on the state legislature’s calendar, if it ever does, we decided to do nothing. So we haven’t bought back any stock and it still sits there. But potentially, the other reason to have a stock buyback is our stock is thinly traded. We’re very comfortable with the company. If a block became available, I presumably would take a look at it. Assuming our balance sheet can handle it, we would take a look. But the main purpose was because of what the activity in the Meadowlands when the legislature put up a referendum for a casino license in the North. I hope that answers your question.

So a follow-up, I had probably gotten – I had mentioned the dividend. Is there any consideration of an increased dividend or a special dividend in the future?

So our business has changed a little bit in terms of its focus. We – the 4 properties that we have purchased, Rustic Inn, Shuckers in Florida and the 2 Alabama Oyster Houses, we not only purchased the operating entities, but we purchased the land and buildings that support it. So essentially, we’re sitting with some $17 million to $20 million worth of real estate. And those deals are very attractive deals. We’re buying them on an average of 5.5x trailing operating profit. So if you look at it and you say, hey, I got – if I’m buying a deal that has $1 million in operating profit and I’m paying $5.5 million for it and the land and buildings come with it, what did I really pay in terms of a multiple? Well, the answer is this: if it’s making $1 million, and let’s say I wanted to sell the property and I said to the guy that’s buying the property, what are you going to pay me for this property? I’ll guarantee a $500,000 a year rent for 20 years. I think they may pay $5 million, $6 million for it. So I’m really not paying very much for the operating profits, if anything. That deal is a better deal for us, not only for that reason, but also we become our own landlord. And one of the things that has decimated our EBITDA here in the last 3 to 4 years, we’ve lost $6 million in EBITDA to leases that terminated that we couldn’t renew because either banks have gone through the roof or landlord developments have reconfigured their space and decided they didn’t want a restaurant there. So for a variety of reasons, we prefer to be owners now. That has put pressure on our liquidity. Not only did we purchase these four properties in the last couple of years, but we also spent a great deal of money reconfiguring and recreating the Sequoia. So we’ve put ourselves in a position where we would not – we were never net borrowers until a couple of years ago. And now we’re borrowers. So until we get more liquidity on our balance sheet and that liquidity might always be a little tighter than it was in the past because of our desire to purchase more properties, I don’t see an increase in the dividend. I also don’t see any reason for us to reduce the dividend. It represents some 4% of the value on the price of the stock. We think that’s a good return for our shareholders. I would imagine – and this happened one time before, where we sold an operation for a significant amount of money and we declared a special dividend at that point. But that’s the only way I could foresee a special dividend coming along if we sold something that we didn’t have need for the cash. But right now, I think we’re pretty committed to finding more spaces where we own the property. We’ve looked to buy properties that have been in existence, operating businesses that have been in existence for a long time with good management and they own the land and building we need. That’s our preference. That doesn’t mean we’re not going to look at leasing, just leasing spaces if we find an attractive deal. We’re buying places that have good long-term leases. But our preference now is to buy the properties underlying the operations that we purchased.

Thank you.

My pleasure. Thank you.

Thank you. gentlemen there are no additional questions at this time. Would you like to make a closing remark?

All right. We’ll see you next quarter. We’ll see how we do. Thank you.