Ark Restaurants Corp (ARKR) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Ark Restaurants third quarter 2011 results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Tuesday, August 16, 2011.

I would now like to turn the conference over to Mr. Bob Towers, President. Please go ahead, sir.

Thank you, Camille. Good afternoon and thank you for joining us on our conference call for the third fiscal quarter ended July 2, 2011. With me on the call today is Michael Weinstein, our Chairman and Chief Executive Officer; Bob Stewart, our Chief Financial Officer; and Vincent Pascal, our Senior Vice President and Director. 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. Our website is www.arkrestaurants.com, that's arkrestaurants, plural.

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 upon them. We refer everyone to our filings at 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 Weinstein.

Hi, everybody. This is a quarter that is not so difficult to explain when you understand the components of the differential between last year's quarter and this year's third quarter. Overwhelmingly the thing that contributed to the negative results compared to last year was the flood that was experienced by one of our restaurants in Washington DC, Sequoia in Washington is in a complex called Washington Harbor. And that complex actually has a retaining wall to stop flooding when the Potomac overflows, and the retaining wall did not work and literally flooded the whole complex, not only our restaurant but five others. We were probably in the best position because part of our restaurant is the second floor facility which didn't get touched very much but the whole first floor was wiped out and we were closed for many weeks. Obviously we had business interruption insurance, asset liability insurance.

We've applied for $600,000 in business interruption insurance. So that is really a big part of the differential from last year's quarter to this year's quarter, and we're pretty confident we'll get all of that money. And in addition, we've applied for another $600,000 to $700,000 in insurance for damage to property. But that is not -- that's aside from the differential in the operating results. We didn't write down those assets because we're going replace them anyway and insurance is going to cover that. So there's somewhere around the $600,000 figure that's contributed to this decline in operating profit this quarter compared to last year.

The second influential factor is that we are in the process of doing several deals and writing off legal fees as incurred. And for the deals that we did sign, one which is with Walt Frazier, for a restaurant bar that's kind of sizeable, we're required to straight line rent even though we're not paying rent. So there's no cash flow, cash going out from the business, but from an accounting point of view we have to account for the straight line lease, so that affected the quarter by another some-odd $100,000. In addition, there are legal fees associated with three or four deals, that was another $200,000 to $250,000. These deals are all moving forward, we're very positive about these deals, but none of them are open yet, and once they're signed we're going to have to straight line the leases, like we did with the Walt Frazier deal, but we're expensing everything as incurred. And last year's third quarter, we were not active at all with new properties, and there were no legal fees regarding. So this all has to do with oncoming business that we're really quite confident about.

Weather can be an excuse in our business. It's hard to define but this year we had terrible weather in April and May, and didn't get much use of our northeastern outdoor cafe seats. That was a contributor. And where there is a dilemma that we're trying to work through is cost of food, all commodity prices are well up as you know. We've been reluctant to raise prices, in the middle of May we started to change menus and get a slight price increase, but I must tell you these price increases that we're getting from customers, we're really hesitant about being aggressive in this type of economy, even though the New York business seems to be fairly strong when it's not raining. Certainly we don't want to get aggressive, and right now menu prices that we're raising did not in any way even out the additional costs that we're facing with purchasing these commodities. So that's an area which we're trying to address.

We've always been very generous with portions in our restaurant. People come to us, and there are a lot of doggy bags going out of the restaurants at the end of the meals. We're considering maybe reducing portion slightly, maybe 5%, but we don't think there'll be any perceived differential in value. The world is aware that everything gets more expensive. Rather than raise prices, we're now beginning to look at that and experiment with reduced portions and refigure some of the menus, take off some items that have become very expensive, but on the other hand, balancing that always as people come to these restaurants for a reason. There are lines when there's supposed to be lines, and we don't want to price the end of the line and we also don't want to short change that line and make the line disappear. So it's a difficult, difficult issue for us. And we figure about $250,000 of operating profits were lost in the quarter, just through food cost differentials from last year.

On the positive note, beyond the new deals that we're doing, is that business is pretty good on the sales side. Vegas has made a turn. There's not anything really sensational about that turn yet, but we are in positive territory. As I told you on the last quarter, we added a burger bar, and we placed three fast-food positions with a full service burger restaurant, and that's turned out very, very well. Essentially we've replaced about $1.8 million in sales, something eventually that looks like $4 million to the [build]. So that should positively help operating profits in Vegas for us.

Our food cost is still doing well everywhere. Again, New York business, it's very, very strong when the weather is cooperating. Washington business is doing fine. When we reopened Sequoia, we reopened with pretty strong sales numbers. Now part of that has to do with we're one of the early ones to be reopened in the complex, but we think the product is better than it's ever been. The restaurant looks great, so we're pretty confident in the sales level. For the month of July, going beyond June, we're up about 6% in comp sales. So this seems to be moving forward in a very positive way in all our markets.

So it's an unusual quarter. We had some bad luck with Sequoia in DC with flooding. That's sort of delaying the operating profits that we would have had. But we get the insurance, we'll account for that in a future quarter. I imagine it could extend into the first fiscal quarter of next year. I don't think we're going to see anything for September from the insurance people, it's just a complicated problem, includes the landlord and there's some (inaudible).

So things are not in any way negative in our mind. It's just that the quarter was a little bit rough with these unusual circumstances. Food costs will remain a challenge. Minimum wage has gone up. Insurance premiums on health are going up. But we're pretty confident that comp sales, if they continue this way, will more than cover that and add a little bit, operating profit should be very respectable. Any questions?

(Operator Instructions) [Justin Putman] with [Telensa] Investment Group.

Hello, good afternoon. I was wondering if you might get maybe a little bit more on some of your future projects you're working on and how those are going?

Yes, well the 1 that's near -- there are 2 that are near opening and for some strange reason they're both basketball related. One is with Clyde Walt Frazier, who has -- who will be a partner with us in a 10,000-square foot facility on the far west side of Manhattan, 37th Street and 10th Avenue. And it's going to be a very upscale dining experience. It's not like sports bars that you've ever seen. Very stylish, he's a very stylish guy. He's an icon in New York, and elsewhere. And we think it's substantial draw. So that will open sometime in January now.

We're also doing something called Basketball City in New York where we're providing the foods for a 66,000-square foot basketball facility. And not only do we have the small burger restaurant in that, but we're the exclusive caterer, and that shows a lot of promise. Parties have already been done for Nike and Puma, Volkswagen. They have special entertainment events.

The facility is basically for league basketball, not professional basketball, like a lawyers league, a restaurant league. There are 7 courts, they're busy all the time, but we have the ability to close off the courts for special events. And we think because of the way this is configured, essentially a 66,000-square foot facility with no pillars in it, it's clear sight line, it has parking for 150 cars. The load-in is very easy, come right off the highway into the facility. There is not a facility like that in New York other than the convention center which is union and difficult to load in and load out. So for 5,000 people events, we think this is ideal, and it's already proven to be able to handle those events and people are liking the experience. So we'll be in full operation with that probably in October or November.

We're also in the final stages of negotiations with the Museum of African Art on 110th Street and 5th Avenue. That also has exclusive catering portion to it. We have a 6,000-square foot catering ballroom as well as a restaurant downstairs with about 300 outdoor cafe seats. 110th and 5th Avenue is right at the corner of the northeast side of Central Park. All the views are of Central Park; they're spectacular. And there's really nothing up there in the way of what we do, and there are tons of hospitals around and there's a big residential community. And we think that'll be a big attraction also.

The rent deals on all of these are very tenant favorable. We -- in every instance we're approached to do these deals, as opposed to going to a landlord and saying how much do I need to pay to rent this space. It was quite the opposite, it was what do we need to do to get you guys in this space. So we think we made very good business deals. The Museum of African Art won't be open until next spring, but we're already starting to do a small amount of catering in this facility. So that's the New York portion.

There's a deal in Brooklyn we're close to doing. I don't know whether we'll get to the finish line with it, but it's a waterfront property in Williamsburg -- which Williamsburg in general is very hot. There are no waterfront restaurants in Williamsburg. There are in Brooklyn, but not in the Williamsburg section of Brooklyn. And it's right where the ferry and the water taxis come in to Brooklyn so we think that could be a hot location.

In Vegas, we've done the Sporting House. In New York-New York we did the Burger Bar in New York-New York. And we're actively looking at other deals. Right now we have about $9 million in cash at the bank so we certainly have the ability to do more, but we're just be are very careful. They have to be tenant friendlily deals where we can [visualize deals].

Okay, good. And then I had 1 other question regarding the current business environment. Did you say that the comp sales so far in this quarter are up 6%, is that Company-wide?

Company-wide, yes.

And last-- the third quarter, it was 2%, is that correct?

Correct. There seems to be some acceleration. Now, what happened in the last quarter is we had just -- we had no use of outdoor cafe seats anywhere along the northeast until the third week in May. I don't remember a stretch in the history of this business where we didn't get seats open until that late in the season. So if you probably looked at June alone, I think we were up 5% Company-wide in June. We were really dragged down in April and May.

Okay, okay.

So it's not like there's -- what I'm trying to say is, it's not like all of a sudden a 2% business became a 6% positive business. It was probably a 5% positive business that was unfortunately hit with 2 bad months of weather.

Okay, good. You're headed in the right direction, though.

Yes, absolutely. What we need to happen here, look, it's no magic here. We're taking out $4 million less in EBITDA in Las Vegas than we did 3 years ago. Las Vegas-- when the decline was over, which took place over 3 years, we're down 23% in sales, and minimum wage went up, food costs went up, health insurance went up, and the deals we have with these hotels in Vegas are such that we don't want to lay off people and give bad service and make the hotels look bad and complain to us about the way we're running their facility. We do 70% of the food and beverage business at New York-New York. So we're attached at the hip. So our ability, forget about the moral basis of -- we want to keep people employed. But truly even if we didn't want to keep people employed, which is not the case, we don't have the ability to do that because we think in a tough economy people are going to spend fewer dollars, and when they spend those fewer dollars, they want full service, they want a memorable experience. They don't want to be waiting for their food, they don't want to be asking where's my waiter or waitress and they want to see a host at the door all the time.

So we really haven't been able to do anything from our business philosophy on the payroll expense side. And actually it's gone up, because the minimum wage increased, and all sorts of new labor laws, where if a person works 3 hours, they got to be paid for a fourth hour, whether they work it or not. So the-- what really has to happen here is we do need 6%, 7% comp sales off of this bottom that we've been going through the last couple of years. But we really need Vegas to get stronger, because we're missing $4 million of EBITDA in Vegas. And we think it'll get there. I don't think it will get there this year or maybe next year, but I think it's accelerating. The people who should know this better than we do, who are the people who book rooms in Vegas and deal with room rates, they're edging up room rates and their occupancy is very strong. Now they bought the occupancy for a long time with $99 rooms. But now you're seeing some room rate increases, and we're seeing a little bit better spend.

And not to talk too much about this, our question has been, and where we've been nervous is there are more rooms than there were 3 years ago. So before New York-New York and Venetian and Planet Hollywood where we are and see a real increase in comps, you've first got to fill up that extra capacity as well. So it's going to be a little bit longer coming, but we're becoming more and more confident that it is going to come. So it's a matter of time, and it's a matter of how these new deals do to see where our operating profits go.

[Mark Salin] with M-22 Capital.

Hello, Michael, I wonder if you can tell me of the 6% increase in comp and then the anecdotal 5% in June, is that mainly from your east coast, or is Vegas?

No, a lot of it's Vegas.

Okay. So you're seeing an uptick there then that--

Yes, absolutely, it's getting better. We don't know what the rate it's going to continue at, but it feels more solid.

Okay. In the fourth quarter, do you expect any other kind of extraordinary costs? Obviously the insurance you can't expect, but legal fees or anything else that --?

We -- I don't think there's anything extraordinary that I could visualize. The answer is no. I mean, the only thing that we're trying to play with here is how we protect ourselves from what are seemingly higher commodity prices that are going to stay higher. In years past, we've had these bumps, and we've had shortages and we see prices go up, then they recede eventually, and we say, gee, why aren't we smart not to be too aggressive with pricing and give customers good value throughout and now we're saying to ourselves, these things don't look like they're coming back. So we have to deal with that and we're going deal with it.

On your last call you mentioned that you were increasing prices a bit, but you sound a little less confident in being able to do that. Is there anything that's changed in your mind, or is that just the general -- ?

No I mean we could be manic depressive here. The-- we just put in what we think is a 2.5%, 3% increase throughout the Company and it seems to be holding well. We don't hear anybody complaining about prices. We still have an umbrella of safety between us and other restaurants. We think we're more efficient then if you look at our menu prices and look at others, I think we're below others. Now maybe we shouldn't be, but we've always felt comfortable offering better value than people we think who are directly on point with their restaurants as compared to ours.

I think it's got to be, as I said before, we've got to serve slightly reduced portions and refigure the menus a little bit where we have certain costs that are crazy. I mean right now it costs us $40 to put out a plate of lamb chops at our steak houses. I mean so what can you charge for lamb chops? But they should be on the menu, but how can you redirect people or have better margin, product around that, and that's what we're working on. It takes a little while to implement, but we're working on it. And I think we'll solve the problem. We've been in the business a long time, and we've solved other problems that are as difficult as this. So give us a few months, and we'll have the solution, I'm sure. But food costs will remain a problem throughout the fourth quarter.

I would imagine. 1 last question just with this Walt Frazier restaurant and the basketball facility expansion, or initiation. Is your CapEx -- do you have any -- can I assume that your CapEx will be roughly the same as it's been this last year or will it be up for 2012, are you going to have an uptick in that or--

This year it's up-- going to be up slightly because we didn't have anything last year. But the majority of the CapEx spend you will see in the next fiscal year.

Very good. Okay, thank you, Michael.

My pleasure.

(Operator Instructions) [Michael Mariowitz], private investor.

Mike, can you speak in general about your feelings regarding catering? It seems to, based on your remarks, be more of a role within the overall Company. And secondly, do you have any thoughts about how Boston could be expanded from your 1 restaurant there?

Well, let me deal with the first. We've always done catering in our restaurants. It's always been a fairly decent size business for us. We have 1,000-seat restaurants in Sequoia. We have many thousands, tens and tens of thousands of square feet at New York-New York and 30,000 square feet of meeting room specifically. In Washington, Sequoia's a 27,000 square foot facility, Bryant Park is a huge facility here, Sequoia in New York is a huge facility. The Grill Room is a big facility. We have always done catering in our restaurants, and people have always thought of us that way. We've never done off-premise catering in any big way. People are always -- the calls we get, which are numerous, are about can we do an event in your restaurant.

That sort of changed a little bit when we did [running] at the Museum for Art and Science. We have a separate facility there, and we're the exclusive caterer in the whole museum, which is 9 floors. And there are many times during the past year -- its still in its infancy -- that we've done events on multiple floors at the same time in addition to running the restaurant on the 9th floor. So that changed things a little bit for us, because when we're catering into a facility that's not a restaurant, that's incremental, we don't have to close a restaurant and displace restaurant sales to operate the catered event, they're in their own space. That became very attractive.

And that's why we did Basketball City and that's why we're doing Museum of African Art. We can operate facilities simultaneously, a restaurant and a catering facility. And we'd like to find more of those deals, obviously. But it's not the only direction this Company wants to go in, a big positive when you can become an exclusive caterer into a facility such as the museums that we're doing, and basketball.

[In relation to] Durgin Park and Boston; Durgin Park -- we used to operate restaurants in Boston many years ago and the leases ran out and weren't able to renew them, and then Durgin Park became available in Faneuil Hall. And we did basically a real estate deal there, we bought this thing with a 25-year lease, very, very inexpensively. And if the restaurant didn't work out, we have the right to lease it for any retail purpose. And we think, based upon what we paid, the returns would be very, very good and -- But the restaurant is doing well and it's doing better every year and we think we're improving quality and people are beginning to notice. So we continue to run it as a restaurant.

But we don't have corporate overhead in Boston the way we do in Washington, in New York and Las Vegas. And so we don't really look to expand in areas where we don't have good control of corporate overhead. And if something came up that was a good real estate deal or a good buy --something at a good multiple, favorable multiple of cash flow, we definitely look at things in areas where we can watch it and monitor it carefully and influence it. But -- so Boston is 1 of those areas, Des Moines is not, so if something came up in Boston, we'd take a look at it. But we're not aggressive in Boston.

Okay, well thank you.

My pleasure.

And Mr. Towers, there are no further questions at this time. Please continue.

All right well thank you, everybody. We'll speak to you at the end of the fourth quarter and thank you for being on the phone today. Have a good rest of the summer.

Ladies and gentlemen, this concludes the Ark Restaurants third-quarter 2011 results conference call. Thank you for your participation. You may now disconnect.