Ark Restaurants Corp. (ARKR) Q3 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the Ark Restaurants Third Quarter 2021 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. It is now my pleasure to introduce Sonal Shah, General Counsel. Thank you. You may begin.

Thank you, operator. Good morning, and thank you for joining us on our conference call for the third quarter ended July 3, 2021. My name is Sonal Shah, and I'm General Counsel of Ark Restaurants. With me on the call today is Michael Weinstein, our Chairman and CEO; Anthony Sirica, our Chief Financial Officer; and Vinny Pascal, our Chief Operating Officer. For those 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 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 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 the call over to Michael.

Hi, everybody. Thank you for joining us. I think, first, I'd like to hand it over to Anthony to review our balance sheet, and then I'll make comments about cash flows and how we're doing in all our venues.

Thanks, Michael. Yes. I just wanted to hit on a couple of highlights on our balance sheet since last quarter. Our cash position is $18 million. Currently, it's probably about $19 million at the float. So it's obviously reflective of the great quarter that we had. Our cash was about $12 million at the end of the second quarter. Included in our balance sheet, we had another $3.2 million of PPP loans forgiven, which brings the total to $7.3 million out of $15 million. We have applications pending for another $4.5 million, which hopefully will be forgiven this quarter. We also have on our balance sheet receivables for tax carry back claims that we made given the new requirements that we were able to carry back losses five years. That was changed last year. So we have about $2.3 million of refunds pending as well as another $1.5 million or $2 million of refunds that we still need to apply for, because there's an order in which these things need to be done. Of the PPP loans, we expect approximately $1.5 million to $1.9 million will not be forgiven as a result of not being able to spend the money within the COVID period. Of those amounts, the majority of them we will convert to loans at the 1% interest rate pay off over 24 months. The other significant item on our balance sheet happened subsequent to the quarter, but is reflected in the quarter was that we had $9.7 million of revolver borrowings that were coming due in May. We worked with our bank to convert them into term loans, which are payable $500,000 per quarter starting September 1, 2021 next month through June 2025 with -- at which point there is a balloon note on the end. So, that we've been able to alleviate the pressure of having to pay off that revolver. Everything else on the balance sheet is reflective of the quarter that we had. Receivables are up, inventories are down a little bit, payables are up a little bit, but all are in accordance with the great quarter and the increase in sales that we had. I'll turn it over to Michael.

Hi. I'd like to make a projection that when the tax refunds are received and the monies that are going to be granted the additional monies. Our balance sheet at the end of the September quarter, if business continues as we expect, our balance sheet will probably reflect cash equal to our total long-term debt give or take a few dollars, but it will be very close. So we're -- from the balance sheet point of view, we're in terrific shape. In terms of cash flow, I think the significance of the quarter just ended is that, we were about equivalent to the comparable quarter of 2019 going back two years pre-COVID. But in that quarter -- in the 2019 quarter cash flow from the New York restaurants was about $2.4 million. This quarter the current June quarter that just ended cash flow from New York restaurants is $400,000. So that $2 million that is just missing had to do with several factors. Number one, our restaurants in New York especially Robert and Bryant Park rely greatly on office traffic for both lunch and dinner offices in New York or anti-office buildings. Events there were no events of any significance in this current June quarter. Theater -- theater business is closed. Bryant Park draws heavily on theater district. And tourism, there's been no tourism. So the fact that we were profitable at all in the New York restaurants is kind of a good result, given our dependency on those four factors. So, if we look back to the 2019 quarter, normalizing those four factors when and if they become normal tourism theater district, office buildings, events it was a great quarter. And what made it a great quarter was our restaurants in the South; Florida, Alabama, Las Vegas. We're seeing numbers there that are spectacular, in terms of headcounts coming into those restaurants. Vegas is interesting because we're doing record business -- weekly business compared to comparable weeks in 2019, but there's no convention business in Vegas. So it's all tourism at this point. We're also dealing with the handicap of venues being affected by different regulations at different times as mask wearing is necessary now again in Vegas. During the June quarter, some of our restaurants were only allowed to have 50% occupancy. It's messy, but we prevailed and did really well and our managements in these various venues were -- had to deal with a lot of requirements for them to be flexible. They did a great job. There's no shortage of COVID cases in our restaurants at various times. So we seem to always have a few people out with COVID, fortunately light cases. But everybody has to work harder because you can't replace them for the 10 to 14 days that they're out because the labor pool is very diminished right now. So all in all a great quarter. What we're seeing in the current quarter July started out just like June. Really, really strong as we got into August. With the Delta virus we're seeing a little bit of dampening. It's hard to tell whether that's the Delta virus or just seasonality. We suspect it's a little bit of both. But the quarter should be a good quarter. And we are seeing, despite the Delta variant significant bookings for events in the fall. Whether that continues, given the Delta variant or not, I think we had in terms of the event business some feeling on the part of people that book these events that COVID was on the decline. And there was a period of time, when our office got very busy booking again the fall and winter. Whether that continues now with this concern about the Delta variant I don't know. But so far we don't have any cancellations. I think there's a wait-and-see attitude about this. In terms of pricing, we've been up to get some increases on our menus. We've been doing that gingerly. We don't want to scare customers. Our margins are being compressed a little bit by food costs. I tell this story about Rustic in Fort Lauderdale where our food costs were up 10%. But one item that used to be a 50% cost item is now an 88% cost item King Crab Legs. A lot of it has to do to destructions and distribution. Some of it has to do with the fishermen aren’t out fishing so the supply has been cramped down. But we've taken the attitude that where a product is a part of our brand and King Crab Legs and Dungeness Crab and Rustic we’re famous for that. We probably serve 200 orders a day of those two products. But we don't want to scare off our customer so we're taking the hit. And our menus don't even begin to reflect what our costs are in Rustic Inn and some items on other menus. So there'll be a squeeze in margins, but the foot traffic coming into our restaurants all of our traffic has been strong enough and these restaurants remain extraordinarily profitable in terms of the cash flow they yield. So I hope that gives you a sense of where we are right now. If you have any questions please ask now.

Thank you. We will now be conducing a question-and-answer session. [Operator Instructions] Our first questions come from the line of Roger Lipton with Lipton Financial Services. Please proceed with your questions.

Yes. Hi, Mike. Excellent quarter, obviously. I've just got to chime in for a second. I see that just in the last couple of days J. Alexander's reported and they have -- they -- their assisting comparison in terms of a thin stock it's always been too cheap. And they are about to go private. And they're about to go private at about 7 times their current run rate of EBITDA. And your stock as you well know is trading at about 2.5 times your current run rate of EBITDA. So it would seem that you ought to be considering some, sort of, corporate activity whether it be in the form of a stock buyback perhaps restating the dividend or even considering going private. Being public has not generally served the company particularly well over the last 30 years because you haven't sold any corporate stock to the public. And so it would seem like if I were in your shoes you and your family could get a great deal of current liquidity as well as the remaining equity participation in the future. And the current shareholders could be taking that at a very substantial premium to the current price. So those are my thoughts at the moment.

All right. You want a response or you're just making a speech?

I'm making a speech, but I'd be interested in your thoughts in terms of a response that the stock is incredibly inexpensive.

So Roger a few things. Regarding dividends, I think, it's inappropriate to be handing out dividends and certainly I benefit from that as well as everybody else. But handing out dividends at a time when there's still a great amount of uncertainty with COVID and at a time when we're taking the loans from the SBA and converting them into grants. I just -- there's something that doesn't smell right to me about that. In terms of a private transaction or buying back stock, obviously, we're aware that the stock probably does not reflect current operating results. There are two factors that weigh heavily on -- that would weigh heavily if we were even discussing this which we're not. Number one is our leases in Las Vegas. They have 17 months to run. We're beginning to -- as you know MGM which owns New York-New York has gone through a significant restructuring of management. The people that we had a constant partnership with because in New York-New York, we're essentially a food and beverage department, have all with the exception of one key person, they've all left, they've got -- they've taken buyouts. And so we have a meeting in September -- beginning of September with them to start to discuss what the relationship will be going forward. And the fact that they are having a meeting with us means there's some interest at the end of 17 months in having us continue. But we don't know what that's going to be structurally. So, there's a risk in that some of that cash flow, or all of it for that matter, could conceivably go away. So, I think buying back our own stock or having anybody be aggressive at this moment would be foolish. Number one. Number two there's the Meadowlands which unlike the potential negative of New York-New York's negotiation which we -- by the way, we're optimistic about, but you have to consider that it might be a minus as opposed to a positive. But the Meadowlands to us is a huge positive. First of all, we're probably the largest sports betting facility on the East Coast. As you know from prior conversations, we cannot take in income unless it's distributed because of our minority interest in that. That minority interest of around 8%, our partners are Hard Rock and Jeff Gural who's a real estate player in New York, we're the third on the totem pole in terms of ownership. But the geometry of that investment that we made five years ago could be really significant to our current shareholders, some of whom I know have their eye on that and are comfortable owning our stock despite the fact that it doesn't reflect the current operations in the cash flow. So, sports betting has been significant, significant cash contributor to Meadowlands. We're paying down debt. And for the first time I think this year, Meadowlands will make its first distribution. That will not be an insignificant number to Ark that we'll be allowed to report. But more importantly, as New York State starts to play out with the downstate casino licenses, which there's been a moratorium on because the guys they've built upstate had to deal with [Indiscernible] essentially that nothing will happen downstate until 2023, which will give the upstate guys time to recapture some of their capital investments. But you have MGM on New Yorkers, you have betting owning -- and the cash goals. And you also have a Venetian, a block of property in Queens. And there's a lot of lobbying pressure going on to try to get those downstate casinos issued prior to 2023. But even if we wait until 2023, once those downstate licenses are issued we don't see any way in, which New Jersey doesn't react and make Meadowlands a casino. And if it were to become a casino, I would tell you that our projections from just casino operations would dwarf our current EBITDA. Our percentage would dwarf our current EBITDA. In addition to, which we have an exclusive on all food and beverage, if it becomes a casino with the exception of the carve-out for our Hard Rock Cafe. So to me, I think our current shareholders should have the advantage of that. And if we were to do a private transaction, I think it would be very hard for us to come up with a number that would be fair to our current shareholders or anybody who buys the stock here given that the Meadowlands could be just two or three years away. I think we would become -- a company or myself or whoever joined in the private transaction, we would be under a great amount of scrutiny, what we knew at the time we did that transaction. And if the Meadowlands becomes a casino, I think it would be a very unfair transaction for us to initiate given that we here really believe that's going to happen. Whether that happens or not -- we may be wrong about our belief but if it were to happen any transaction we do would be very unfair to long-term shareholders or short-term shareholders, who bought the stock with that in mind. So there's no private transaction that's going to happen here.

Mike Thanks for the -- Thank you Michael.

Thank you. Our next questions come from the line of Jeffrey Kaminsky with JJK Consulting. Please proceed with your questions.

Good morning, Mike, congratulations on a terrific quarter in a very challenging environment. I just -- I had a couple of questions some stuff that we have discussed in the past. But the first one being a question that I'm not sure you can answer but, what do you think or what's your assessment of the robust numbers that you delivered last quarter as it being a function of pent-up demand and everybody going back out versus sustainable business and growth? Do you -- is there a way to monitor that that at some point things will level out? That would be my first question. I want you to answer that then I have another question. Thanks.

All right. Thanks Jeffrey. I hope you're well. So obviously, there's pent-up demand. And that -- you would have to go area by area of the country where we are. In New York, I don't think we're getting pent-up demand. The people are back out eating. As of yesterday, now you have to show a passport -- COVID passport to eat indoors. So there's a dampening effect. I would also tell you New York is -- even though Manhattan is probably one of the safest places, if you go by the number of people vaccinated, we had people who just don't want to eat inside. So Robert, which has no outdoor seats obviously, on the ninth floor of the museum, our business has been terrible as people have been hesitant. And those factors I mentioned earlier, events, tourism, theater occupancy and office buildings Robert's lost money every single week. So pent-up demand has not helped Robert and I don't think it's helped -- if you go to Bryant Park all the dining in outdoors it's not indoors. And if it's a rainy day, we're not doing any business. So I don't think New York has been helped by pent-up demand.

The residential neighborhoods the Upper East side trifecta those properties are doing well. They're seeing all that. We're in the corporate Midtown area, where the buildings are empty. So that's why we're not seeing it in our restaurants.

Yes. In Washington D.C. I would say the same is true with Sequoia. We have 600 outdoor seats. If the weather is nice, boom, we're doing great. The part of pent-up demand is not events and Sequoia lives largely on events. So not there. Those properties will only improve as COVID goes away if it does go away. In Florida and Alabama, they're nuts. Nobody wears mask. There may be pent-up demand. I think there is. So yes, I think we're benefiting from that. But I got to also tell you that – and I'll say this in terms of – everything we own, anywhere, we have premier locations. We have great reputations. We have great brands. These businesses – I remember after 9/11 in 2001, with the banks who were all over me because we were losing $0.5 million-plus in cash every single day – every single week after 9/11 because at that time we were in Las Vegas, Washington D.C. and New York. And all of them were gigantically affected by 9/11. I said to the banks these are great properties. The minute people start to come back to restaurants they will fill up. So that's what's happened in general. But without a question I think pent-up demand and the fact that alternatives are not available, movie theaters in Florida – people have used restaurants more so just to escape than before. I think that's true in Florida. In Alabama, we're doing the business, we expect to do in the June quarter and going into the September quarter because our Alabama properties, this is their season. When I bought those properties I thought they would behave more like Florida. They behaved more like Jersey Shore than Florida. So this is their season. Vegas, I think is benefiting from people who want to travel, who might have gone to Europe or Mexico or some – they're looking for some place to go. And Vegas remains a chief vacation. But the numbers we're doing in Vegas which embedded in our 2019 comparable numbers are being done – for most of the quarter the shows weren't open and there are no conventions. And for part of the quarter, Vegas was 50% occupancy. So the numbers we're doing there are staggering and I think that will continue. Yes. For a period of time during the June quarter, Vinny is telling me we were 50% occupancy as well. Yes. But the numbers you're seeing from us in the June quarter were largely created from mid-May to the end of June. That part of business got really, really good. So that's the answer to your first question. Yes, I think in all of these venues, what with pure increases that we've seen above what our expectations were are probably Florida-centric. I can give you reasons why we're doing less business than we should be doing i.e. conventions in Vegas. Alabama is sort of where we expect it to be and New York isn't getting any advantage. So I think part of the sales numbers by the way are also where we did increase menu pricing. But in Rustic, for instance, we're seeing good numbers but our food costs are terrible. We looked at the 2019 headcount and we're basically where we were with 2019 headcounts. Now that's interesting also for Rustic in particular, because Rustic is four seconds away from the cruise ships and there have been no cruise ships. And we do a significant amount of business when cruise ships are sailing, but they haven't been sailing. So, I can make a comment that said that would be the same as New York with events, tourism, office, buildings being occupied, et cetera, give me back the cruise ships and Rustic would do 20% more. But we don't have those right now. So I think there are a lot of reasons to believe that these sales are real and in many cases will do better as the world gets back to more normal. Second question, Jeffrey?

Yes. So your strategy in the last several years of making some acquisitions of family run mom-and-pop type restaurants that have good reputations and good business models in their respective community has worked very well for Ark. Given a post-COVID world or the COVID world that we live in, I'm assuming that there are a number of operators that have either closed down or are limping through this and have not been in the fortunate position that Ark has been in. That said I'm assuming the broker, the business broker that shows you some of the properties that you've acquired over the years, must be showing you some either vacant properties available or people who just can't continue to hold on like this. Is Ark currently in the position to make another acquisition? I know that what talked about the loans being forgiven from the government. I mean are you seeing a decent show of potential restaurants? And are you in the financial position to make a move if something attractive came along?

So we're more liquid than we've ever been on our balance sheet. So yes, we don't have to go to banks right now to make acquisitions, number one. So yes, we're certainly in a position to make them. I'm sort of -- I had a conversation with a Board member, one of our Board members here today, our criteria what we're going to pay as a multiple of cash flow has always been really, really conservative. We believe that we're trying to eliminate the margin of risk as best we can. So, we paid -- I mean in Blue Moon, I think we probably paid in the end 2.5 times or three times cash flow at Rustic, because we bought the land. If you take out the land at Rustic or Shuckers or the Alabama properties, we probably paid three times. Those deals don't come along very often, but the fact that we could be an all-cash buyer, for people want to get out of the business, is what makes us an attractive candidate for them to sell into. And the fact that there aren't all-cash buyers around, because locally people are used to buying things for 30% down in eight years in notes. And when you're talking to somebody who's 92, they're not interested in eight years of notes. And the brands don't want them, because they don't extend the brand. So, we sort of slip in there with an attractive alternative of people who want to sell. What's happened is, we got Blue Moon in October of last year, just before things started to change. I think if those guys, who I've become friendly with knew where our sales and what efficiencies we had put in place and the cash flow we're getting out of them, they would not be sellers today. I don't think it's easy to find sellers right now in the markets that we're interested in because everybody is doing a lot of business. So if you survive to this point, right now you should be happy. There's less competition because a lot of restaurants are closed, which is another factor in your first question. But we're not seeing anything that we're really interested in right now. But we'll wait. We'll find something. And our preference is all the land underneath the operations. So -- but we'll find things. I'm not concerned about that. They'll come.

All right. Thank you Michael.

You're welcome Jeff.

Very happy.

Thank you. [Operator Instructions] There are no further questions at this time. I'd like to hand the call back over to Michael Weinstein for any closing comments.

Well, thank you all for joining us. Roger and Jeffrey thank you for your questions. We'll see you in September. I'm, sort of, curious how this all works out for us in the September quarter with the Delta variant and what impact that has. But going forward, we're very, very positive about our business. And we're very proud of the people that work for us and what they have done and the sacrifices they made to get us to the point where we're making a lot of money again relative to our size. This was really difficult to get through. And I'm just thrilled that the cooperation we've had from everybody including people at Blue Moon who had to take on new ownership of not knowing us very well and implementing a new way of doing business, because we're a public company and the standards that they had come up to in the middle of all of this stuff. They -- everybody has done a great job for our shareholders. And there's -- that's the reason this company is as strong as it is. So thank you and I'll speak to you in October -- December, all right. It's at year-end.

The year-end. Yeah, the year-end.

Okay. Stay healthy everybody.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Have a great day.