Ark Restaurants Corp.
Q1 2016 Earnings Call Transcript

Published: 13 May 2016

[Operator:]

Greetings, and welcome to the Ark Restaurants Second Quarter 2016 Results. 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's now my pleasure to introduce your host for today's call, Mr. Bob Stewart, President and Chief Financial Officer. Thank you. You may begin.

[Bob Stewart:]

Thank you, operator. Good morning, and thank you for joining us on our conference call for the second fiscal quarter ended April 2, 2016. With me on the call today is Michael Weinstein, our Chairman and CEO. 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 will now turn the call over to Michael.

[Michael Weinstein:]

Hi, everybody. Briefly I would like to review some statements we made in the last quarter just to remind you. The issues that we have faced in the company, and which I think we are handling very well, are twofold; number one, we are churning leases. By that I mean we have bought some leases that were valuable to us. New leases or new acquisition properties have more than made up to that. I think we've replaced a lot of lost EBITDA over the last couple years, and at present time we have nothing that really is in danger of imminently terming out in terms of all leases. So we are in a much more stable position than we have been in the last three years. Secondly, our approach to minimum wage increases, which were most dramatic in New York City region, where we have significant revenues. We are finding that we have price elasticity. Our managers are working really hard to try to limit overtime hours, another part labor or something called spread of hours, where somebody works nine hours, they are paid tenth hour [ph], even if they don't work it. New York City has implemented six mandatory, six days for all employees. So the impact on our tipped employee pay rolls has probably been 50% increase in wages that we pay to them, because we don't get credit for tips that they are earning, towards minimum wage. So this has been a dramatic amount of money for us. So again we've been rescheduling people, taking some chances, some service, coordination, how we get the food in, store it, prep it, cook it and serve it. We've been trying to invent some new approaches. But what we have found at the moment and we're certainly not going to price to the end of life [ph] is that the slight increases in menus, menu price items that we've implemented have been easily accepted and we probably have a little bit more elasticity to make up for these wage increase than we originally thought. So that prospect is heartening. If I go through various regions, Las Vegas we were down in comp sales for the 13 weeks, 1.6%. That is largely due to construction, at New York-New York. In mid-April they opened up a park next to the hotel. That's a big deal for them, has 28,000 seat arena and its continuing construction. They build two 7,000 seat theaters. There are more restaurants out there, but I think in the end we will benefit from the pull from these theaters and the arena. In New York our business is very strong, grew up 14%. That does not include Southwest which is our new open air bar restaurant and Bryant Park; it's our third operation in Bryant Park. Those sales are very, very strong, but weren't open last year at this time. So there is no comparison. But New York is really, really doing well. Washington DC is doing very well. The most [ph[ - couple of operations, leases that termed over the last couple of years Sequoia, which is on its comp driven [ph] 1000-seat restaurant, seems to have good substantial demand. Our catering business here is also very strong. Atlantic City, we're up slightly. That amazes me, Atlantic City as the as the Casino down has been on a downward spiral, somehow we managed to move ahead over the year. Boston, we're up 13% at Durgin-Park, it's our only operation up there. Connecticut we're roughly flat. We operate small places in the Foxwood Casino, not really material. And Florida, Florida we have five operations. We manage and operate the fast food courts at two Hard Rock casinos in Tampa and Hollywood. Our business there has had been down substantially over the last two years, as Hard Rock implemented new marketing [ph] systems on comps and incentive dining, basically they do not allow incentive dining comps, don't [indiscernible] anymore. That hurt our sales dramatically. We are now sort of stable with those sales. I do not expect that they're going to be instituted comps. So we've been down in sales over the last weeks. We also own Rustic Inn, Fort Lauderdale which we acquired about 2.5 years ago. That does extremely well. We're happy despite being downwards here this year in terms of revenue. And I think it's largely impacted by the fact that there is a detour to get to our restaurant, a bridge that takes you over the canal that leads to our restaurant. But the turn is unsafe [ph] because it's new bridge in order to get to the restaurant now there three miles detour. I think that impacted us. But we're still doing a lot of business. We acquired Shuckers in Jensen Beach. That is not in our comps. We did not operate it last year, but that is very strong business for us. And we're very gratified with the transition from the previous owner to us, hand over management, it's been a really seamless transition and the restaurant's performing well. Jupiter, we own Rustic Inn, which we opened last February. So that's really not in our comps [indiscernible] degree. We are doing better there in terms of the losing less. We have not yet figured out - we're running it smoothly. I think payroll's online, food cost here are a little higher than we would like to be. We've not yet figured out the market and how we get more people in there. I think the sales picture is improving. I had been too optimistic couple of quarters ago when I thought we will make profit this year, we will not. Last big item is the Meadowlands Racetrack. We own 11.6% interest in the Meadowlands Racetrack. It's a limited partnership, gentleman [ph] by the name of Jeff Gural is general partner. We are partners with him. Hard Rock Casino owns about 20% of the partnership, and other investors are in it. But we're the - right now we're the third largest investor. There is a hedge fund [indiscernible] and Clairvest, were amongst the money and could covert to common in to limited partnership interest. If they did so, that will make us the fourth largest partner in that. We made this investment some 3.5 years ago, with the host New Jersey would legislate to change its constitution to allow the casino gaming in the northern part of the State On March 16 of this year New Jersey legislatures did just that. They are allowing a referendum to go on ballot in November, which would again allow the casino gaming in North of the State. The specific locations where they will allow it, they are allowing [indiscernible], the specific locations are not named in the legislation, also not named yet in the legislation is the tax rate. And while it's anticipated that a big hunk the of revenue, tax revenue generated would go to Atlantic City, refreshing the city and trying to structurally make it into destination resort. That hasn't been specified in the legislation yet. So the referendum will be voted on in November at general election. We are starting a marketing program, the entity tried to help explain to New Jersey voters why this is a good thing and they should approve it. Polling has been pretty close right now. I think it should pass, but by no means - it will be strong, a strong polling means [ph] for us, that says it will pass. The polling has been pretty much 50-50. Three polls have been taken. The papers in the north of the state editorially are very much in favor of it. State needs revenue. It's projected that this will give State as much as $400 million a year in revenue. Obviously, if this happened we would not only own a piece of casino. We would be [indiscernible] by the additional money needed to build it. But we have an exclusive on four restaurants and all food service with the exception of our Hard Rock Café. The Hard Rock Café would be built, so that could be significant revenue for us as well. One of the factors in the legislation is that you must have an Atlantic City Casino License to operate in the northern part of the State if it's approved. So we would have to partner up with a casino that presently has the casino license in the north. Hard Rock does not have that. So Hard Rock's well aware of the fact that they may not be operating this or where they may have Hard Rock under the umbrella of another casino offering. That is pretty as much for me. I think you have a good sense. Our cash position is good. We haven't taken on any more debt. Our balance sheet's very strong. We expect to have a very good June quarter, at least we're set up for it. Weather does impact us. Let's have some questions please.

[Operator:]

Thank you. At this time we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Bruce Geller with DGHM Funds. Please proceed with your question.

[Bruce Geller:]

Hi, good morning, guys.

[Michael Weinstein:]

Hi, Bruce. You too.

[Bruce Geller:]

Same here. The comps for the quarter were listed in the press release at plus 1%. But some of the numbers that you gave confuse the matter for me because you noted New York was up 14%, that’s a big driver of your business. If such an important part was up 14%, how could the overall comps have only been up 1%.

[Michael Weinstein:]

Yeah, Florida was down 9.3% I’m sorry, I didn’t mention that. I mentioned the construction and the marketing things, the changed marketing at the two Hard Rock Casinos but it was down 9.3%, I think, yes. So if New York was up $800,000 in sales, Florida was down $669,000.

[Bruce Geller:]

Okay, do you think that Florida will remain down at levels that substantial for the rest of the year or there’s something in place to…?

[Michael Weinstein:]

Florida's going to track - from now on in, at pretty much the same way as it is now. We see no reason for sales other than if we pass on price increases, at fast food courts for sales to go up in the coming year. They will not go down anymore because they’ve taken all the marketing incentives away from the fast food area, so those are gone. They’re not coming back. What will happen probably in 18 months it's hard to predict, what the impact will be. But Hard Rock is still building a new hotel and expanding their entertainment center in Hollywood. There's a similar plan which is little further behind the Hollywood plan in terms of getting it built but there’s a similar plan at Tampa to making this thing bigger. We have the exclusive in fast food areas in both. So we would think we would benefit eventually from that expansion. But right now our sales are going to be remaining pretty much on track the way they have been the last couple of quarters.

[Bruce Geller:]

So it sounds like you’re a little bit less enthusiastic about the Jupiter Restaurant at this point in time?

[Michael Weinstein:]

Well, it hasn’t produced the sales we thought it would. We’re enthusiastic honestly about the way we’re operating it. I think the product is really, really good. We pay attention to open table reviews. We don’t really pay attention to the [indiscernible]. There’s no way to know if somebody writing the [indiscernible] review really ate there. But with open table we know the customer was there. And our managers and waiters are talking to customers all the time and we’re getting very good response, really great response, it's very good, great response. The business seems to be building a little bit but it’s slower than we anticipated. We’re very happy with the progress. We’re not happy with the sales level.

[Bruce Geller:]

So you had a lot of moving pieces through the first half of the year. Can you give kind of a directional outlook for second half of the year taking into account the…

[Michael Weinstein:]

Well, we think certain things are very, very strong. Our New York business is extremely strong. There seems to be great demand for what we’re doing, and it does - we didn’t put big price increases in at the beginning of the year, because we just, as I said, we’re concerned about less [indiscernible], don’t want to price against the line but nobody is talking about pricing. Again we think the restaurants - I'm old. So when I started in this business, if you may listed the top 50 restaurants in the country 25 years ago you were probably doing $5 million. Bryant Park did a $175,000, yesterday [ph], okay. So I mean that’s an enormous number. I don’t have a number to start with of course but it’s an all outdoor little bar, hamburger place, that’s sits in the southwest corner of Bryant Park, it did $26,000 yesterday. It’s an extraordinary number. So I think we have some elasticity there. But the most important thing in New York, our business is extremely strong. In Las Vegas we think we start to get a bump. We hope we get a bump from the back of this construction that been listed, that blocked one of the main entrants to the hotel for a couple of years and was unsightly. That’s all been listed and hopefully you get good demand from these entertainment centers they built. In Washington DC Sequoia is very strong. Now in Washington we have 600 outdoor seats. In New York we have maybe 1,500 outdoor seats. So weather affects that also, but if you ask me about demand in Las Vegas, New York and Washington DC it’s definitely there. If we get just, a normal weather pattern here we should certainly outperform last year, may be by a lot and certainly Southwest is going to contribute. The Rustic may be down a little bit in EBITDA for the rest of the year, because of the construction there. But certainly Shuckers is going to contribute a great deal. And so we think we're set up in a rather good way right now. We like our inventory. Jupiter is the only thing that's - is lagging, Clyde is really coming into its own. We’re way ahead of that in there from last year's EBITDA in New York. So I think the year should be a good year. Yeah, that’s my comment. We don’t have - we’re sort of marching in place here, waiting to see what happens in November. We haven’t seen any deals that we want to do. We’re not seeing a lot of deals. We have a lot of discussions. But when I say we’re not seeing a lot of deals, they’re all too expensive, whether it’s a lease, that’s too expensive for a business to buy. It may be a good business, but it’s too expensive. It’s hard to find stuff. But our lease positions are really rather good right now in our business. So that’s as much as I can say about it.

[Bruce Geller:]

So when you put it all together for the second half of the year, do you feel like?

[Michael Weinstein:]

We should be ahead of last year.

[Bruce Geller:]

Okay. Well, that’s good. Is there going to be an incremental spin for marketing on that vote that you noticed in November? You mentioned you are going to done something on that.

[Michael Weinstein:]

The other potential site, which is New Jersey City site, which is being advocated by Paul Fireman [ph] who use to own Reebok. There is a conversation going on with him, with Hard Rock right now, with the hedge fund in Canada on what the marketing budget should be, whether or not Fireman [ph] wants to be a part of this. He has indicated he does. So there may be an incremental spend, but we have - we don’t think our share will be anything substantial, and when I say, I would take, I guess our share would be in hundreds of thousands, certainly not in millions. So that’s where I think we are.

[Bruce Geller:]

And just the fact that you would now have to partner with a casino company from Atlantic City, does that takeaway some of the potential upside if the vote does pass?

[Michael Weinstein:]

Everything takes away from the potential upside. Clairvest [ph] the hedge fund in Canada, if they make the investment, they’re allowed to make it would be dilutive, and obviously legislation, which calls for Atlantic City operator to be a partner, that’s dilutive. But the fact of the matter is, in order to keep our percentage before the legislation call for Atlantic City operator, we would have had to dilute ourselves one way or the other ourselves by either selling additional equity to finance this thing, hopefully at a price that was higher because I think once the legislation - what’s surprised me is March 16 was the date we didn’t think would come for another two years. We were surprise at how fast circumstances created an environment where the legislation could be passed. I mean we made this investment in one year [indiscernible] Atlantic City. So we didn’t expect that. We’re not that smart. And revenue from Atlantic City continues to go down. So and then we did not expect that Caesar's would upset legislators by making a bid for one of the New York licenses, one of those seven licenses. I mean that was like the legislators saying Caesar's here we are trying to protect Atlantic City from competition. We can't protect you from Maryland, Delaware and Pennsylvania. But we are certainly trying to protect you from having casinos in the Northern part of the State which is perfectly logical to do in order to recapture revenue that's leaving the State, and you guys go ahead and bid on a license outside of the State. What are you doing? So I think that turned a couple of heads. We can't predict that. So the legislation took place in an environment that we didn't think would be there and so quickly as it came. Under any circumstances, no matter what we own at this time, it is a big, big upside. It [indiscernible], I thought March 16 when that legislation passed, somebody was - I'm not a stock guy, I'm a restaurant guy. But given a fairly stable balance sheet and decent earnings, it's certainly not a runaway growth company. But paying a 5% dividend I thought the stock would take a little bump, no one seems to care.

[Bruce Geller:]

Right, I guess it's so hard to handicap this rule passing, it was all the variables and then trying to figure out, what your - basically what your option might be worse.

[Michael Weinstein:]

Yeah. So nobody is pricing in an option. It's not really an option because either it goes or it doesn't go. But you would think that somebody would say hey this potential should be priced into the stock. Stock went down four point on March 16. Since March 16 we are three points of something like that. One of the ways we are in a better position than everybody else is this exclusive among the restaurants and bar service and all food service. I think this casino if it happens makes a great amount of money and whatever percentage we have it will be - it will turn out to be a very strong investment in terms of return. But the restaurants regardless of whether the casino makes a lot of money or a modest amount of money, those restaurants are going to hum and there is a big place for us there as well. So if it happens I think we are looking at a completely different business model in terms of the cash flow that we will have available to grow our business in the future.

[Bruce Geller:]

All right. Great, well. Good luck with it.

[Michael Weinstein:]

Thank you, Bruce so much.

[Bruce Geller:]

Thank you.

[Operator:]

[Operator Instructions] There are no questions at this time. At this point I would like to turn the call back over to Michael Weinstein for closing comments.

[Michael Weinstein:]

Well, thank you very much. We'll speak to you next quarter and enjoy your summer.

[Operator:]

Thank you. This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.