Ark Restaurants Corp. (ARKR) Q3 2019 Earnings Report, Transcript and Summary

Greetings and welcome to Ark Restaurants Third Quarter 2019 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Anthony Sirica, Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us on our conference call for the third quarter ended June 29, 2019. With me on the call today is Michael Weinstein, our Chairman and CEO; 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 Newswires 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, I'd like to read the Safe Harbor statement. I need to remind everyone that part of our discussion this morning 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 over the call to Michael Weinstein.

Hi everybody. If you hear some background noise, there’s construction on the street outside of our office. So I apologize for that because it’s not a good way for us to ask them to stop. So there might be a little bit buzzing in the background. I’d like to go over how we performed in terms of parts of the country where we operate. Most of the increase in EBITDA came from our Florida, Alabama and Vegas properties. Vegas is just benefiting from increased traffic in Vegas and more utilization of the arena in the park which is right next to New York-New York Hotel & Casino where we have most of our operations. They are utilizing that 20,000 feet arena more frequently and we benefit from that. In Alabama, we always thought there were synergies between their corporate expenses and what we do here in New York and we had sort of committed to ourselves we won’t change anything until we had a good deal of experience operating those restaurants. And about two years out, we decided earlier this year to get rid of that corporate office, reduce the number of people working on bookkeeping and maintenance, and bringing a lot of that work here in New York. And there was substantial savings in that as well as the fact that the business increased the [Gulf Coast]. So we sort of got the double benefit of increased revenue from increased traffic in the restaurant and lower corporate expenses. So we did very well there. Shuckers and Rustic continue to do very well. We seem to have found some sort of magic formula at Rustic. It keeps going up every quarter and it’s become a major cash flow benefit to the company. We acquired JB’s restaurant and Deerfield Beach six weeks before the quarter ended. There was really no benefit in EBITDA from JB’s. We expect the annual benefit to be roughly to be $1.5 million a year. We’re still working through trying to use all that leverage that’s from our other restaurants in Florida but from our other restaurants in general and our buying power to see what impact we could have on net costs. So we’re very early in the game there. But restaurant does about [11.70] a year in terms of revenues and we should benefit and we think it’s a strong acquisition for the company. Sequoia in Washington did better but is still disappointing in terms of where we think we should be with this restaurant. We think we have all those positions filled with the proper management and we think the menu is better, certainly the design is spectacular. We’re getting good responses from people that are coming there. There’s been a lot of competition. That’s an area not too far away from Sequoia that opened just about the same time on renovation, came on-stream, that area has 18 restaurants. So I think we’d be hurt in terms of our capacity and the amount of demand that come into the restaurant by this new area. But little-by-little, the events are starting to come in. We’re seeing more traffic on days when the weather is good. I think we're on the right path but it did not perform as well as we would have liked. New York has been challenged in several respects. Number one is labor costs. We're doing the best we can to control these. I mentioned in prior calls that essentially tipped employees with in place legislation have seen their income increases 100% in three years. When 60% of your employees in restaurant are tipped employees and their minimum wage salary goes $5.50 to $10 an hour in three years. That's a tough thing to try to absorb. The major problem we have in that is that we don't see very much related price elasticity. Selectively we have tried to raise prices, but this is not -- we are not in an area or an economy where we feel that you could go increase prices 5% across the board. There's too much competition in delivery services and there are just too many offerings in restaurants in every area of the city. So we've been modest in our increases. It's sort of remarkable to me, given a lot of bad weather and given the labor portion, expense that Bryant Park and Southwest were able to keep pretty much flat in terms of EBITDA compared to last year's quarter. So there is no -- we don't see a lot of organic growth in EBITDA in the New York restaurants. The only thing that changes quite honestly is, in terms of increased revenues is we had another very bad weather year, utilization in Washington and New York of our outdoor cafe seats has been really impacted by a lot of bad weather. But we said that last year, and I think we sort of said the year before and maybe this is what the new expectation is, that there's a lot of rain and rain always seems to happen at 6 o'clock at night just as everybody is leaving work and they bypass us, our outdoor seats because it can't be utilized. We are in a good position on our balance sheet. The business has benefited dramatically. And there maybe some luck involved in this. The business has benefited from the fact that the last four restaurants of the five that we've done, Shuckers, Rustic Inn, the two in Alabama, those four restaurants are properties that we own. We own land underneath them. We own the buildings as well as the operations. We bought those at a very reasonable price roughly on average. When we bought them it was about 5.5 times operating profit. Obviously the Rustic having gone from $1.5 million to $3.5 million in operating profits, we wound up with something that we bought for 2 times current operating profit. JB’s we do not own land. It was a building we have a 25 year lease. We do have right of first refusal on that property. We think we are likely owner of it at some point and we think we can do that at a reasonable price. Our goal is to find more of these and our portfolio should be more representative of that type of deal as we go forward. We just recently in Florida we moved Hard Rock Cafe and Casino in Hollywood. Our fast food operation was moved by casino to a new location. We opened a couple of weeks ago. We’re actually doing more business than we were doing in the old location and the hotel is still under construction for a major expansion. In Tampa, we have a situation where we’re currently closed for three months as they redo the area in which we’re in. That property is also being expanded. El Rio Grande in New York, the building has a lot of construction interrupting our business. So all this was taking effect during the June quarter. So I think if we had normalized those things our EBITDA would be better by a few hundred thousand dollars. So what we have is business that’s in very good shape at this point, starting to hit where we think we should be with properties that we have. We still have a long way to go with Sequoia. I think we’ll benefit greatly as time goes on from additional operation profits from Sequoia. And we’re looking -- we are out there looking for properties to buy. I hope this gives you a pretty good understanding of where we are. And I welcome any questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Anthony Chiarenza with Key Equity Investors. Please proceed with your question.

Good morning. Can you give us an update on the Meadowlands and how it’s progressing at this point?

I’d be delighted. So in terms of operations at Meadowlands and the balance sheet of the Meadowlands, the balance sheet has improved dramatically there because we got some $15 million in -- $7.5 million for the rights of FanDuel for sports betting on-premise and a $7.5 million advanced against profits. So $15 million immediately went to pay off debt. There is an online deal that’s being done where we get a $5 million buy-in for the rights which will also help with the balance sheet. Plus the racing is not a money earner, but sports betting has been terrific. We’ll doing -- we will do over $50 million this year in sports betting. We think there is a 5% hold, meaning that we will get about $25 million profit off of that. That is split with FanDuel. Our expectation on a fully diluted basis of what our share of that will be is some $800,000 a year at that rate. We don't recognize that until it’s distributed. We think there will be a distribution in the fourth quarter of this year. Although we're not in control of how much of the $800,000 we think we deserve will be distributed. So from a sports betting point of view, it's turned to venue around dramatically. The food and beverage is obviously benefited by sports betting. Our food service business is highly profitable now. We -- Ark doesn't get very much from the food service business because when this whole thing was starting we basically said we'll manage it. We don't want to take losses, we don't want to take profits. We just want to -- we knew there will be heavy losses at the beginning. And until we get a casino -- if we get casino, we sort of do that pro bono. I think there’s 5% management fee percent of profits and a percent of -- a 5% percent of profits as a management fee. So we'll get some small amounts of that. In terms of a license for casino gaming, as you know, not only do we own a part of the LLC, but we also have exclusive rights to all food and beverage with the exception of the carve-out for the Hard Rock Casino - Hard Rock Cafe. Other than that, we hold beverage and all food rights if the casino was there. I don't see very much activity in terms of movement in Jersey for a casino in the north right now. There -- I think what the lynchpin will be and I think then there will be a rush is when New York City gets downstate casinos. The promo when you made the deal for except casino licenses initially said, he won’t put anything downstate, meaning Yonkers or Queens primarily or national accounting until a seven year grace period had gone by to help the upstate casinos. We're two years away from that. So I think that will be the key to getting Jersey to move on a license. But our position in terms of balance sheet, we made roughly a $5.6 million investment. We own somewhere along the line about $1.7 million. We're getting the interest on that $1.7 million now which will start to show up next quarter. We're going to be benefited by the distribution of sports betting profits. We're in good shape while we're in a holding pattern. That's the best I can describe.

That sounds good. That's very helpful. Now in terms of New York City, what are your thoughts at this point? Is it just to maintain stable -- and I know you're looking to acquisitions, and I think New York is probably not one of your current spots you’ll booked for opportunity?

So we’re not looking to do anything further in New York. The main danger to the restaurant business nationally is the $15 minimum wage. Now there’s no one working for us as a non-tipped employee. So all back-of-the-house people, the dishwashers, cooks, managers, assistant managers, nobody makes less than $15 an hour in any venue. Alabama has a $2.70 minimum wage, there’s nobody working to $2.70. We can’t find people at $17, $18 now in Alabama right now. So -- but this is big push towards a $15 universal minimum wage. Now that would -- the way the legislation is just written and passed in the democratic house which is the Senate obviously is not paying any attention to, that’s Republican Senate. That legislation doesn’t allow for tip credits, while I have people on average in New York making $40, $50 an hour and their minimum wage right now is $10. That’s the minimum wage for a tipped employee. And if they would go to $15 an hour that’s 60% of my workforce getting a $5 rate raise, above the $10 and they are making $40, $50 an hour. And we don’t -- we disagree strongly with that in terms of economic preservation. But that would be everywhere nationally if that same to pass. So the 2020 election becomes sort of important to the restaurant industry and that if the federal government doesn’t allow to tip credits, restaurants are going to be under a tremendous expense pressure. The difference in New York right now as opposed to Washington DC or other venues, New York legislatures which is democratic legislature right now is pushing through the elimination of the tip credit. We don’t think promo is going to sign that. We think there’s been strong evidence that this would further harm the restaurant business, full service restaurant business. So for the moment, we think things are fine. But long run, it’s questionable about the viability of maintaining our current expense structure and our ability to figure out how to deal with it as it comes to pass where they eliminate the tip credit. That’s the biggest question. New York is sort the center of gravity for all of that right now.

There are no further questions at this time. And I would like to turn the call back to Michael Weinstein for closing remarks.

I would like to mention one other thing. We are embarking on a venture in -- outside of Columbus, Ohio in a town called Easton, Ohio which is -- gets 30 million visitors a year. It was started by Leslie Wexner and Georgetown development in New York is the partner. And over the course of the years we’ve always been asked to give advice what they should be doing in terms of restaurants. They feed 30 million people a year that come to that town which was built 20 years ago. Because of the upscale of retailing, they have been pretty edgy in their retailing and people go there to shop and be entertained and to eat out. Their feeling for the last few years is that these leases they signed 20 years ago when the project was starting rolled with for the most part either local Columbus restaurants or with some national chains like P.F. Chang's, others -- Smith & Wollensky and other names you would probably recognize. And they want their restaurants to be more idiosyncratic and bring in people from all over the country who are doing interesting restaurants and presenting edgier products. So we've sort been asked to get involved in that mix. And we made a proposal to them and they're excited about the proposal. And this would probably encompass over the next five years some 20 to 25 restaurants. The town presently has 49 restaurants and is expanding. So we're at the very beginning of this. But if it were to be successful, we think this is a pretty significant opportunity for the company. The first stage of it if it takes place and we think it does take place would be over the next 18 months to build six restaurants either with -- either our own restaurants or in partnership with other restaurateurs, who see the same opportunities we do but don't have the capability of traveling to Easton, Ohio and would want us to manage it for them or be a joint venture partner. So it's an interesting opportunity. It does not require a lot of money from our balance sheet. And that's why we're looking at it. What we are able to generate in terms of cash flow to invest, we're sort of holding that for potential acquisitions where we either -- where we own the property, the land, the building as well as the operations. So this is something that is financeable by the developer as opposed to us. We'll keep you up-to-date on this as it goes along. But we’re just at the very beginning. I think it’s kind of exciting. With that, thank you for joining us and we'll see you next quarter.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.