Ark Restaurants Corp (ARKR) 2019 Q4 法說會逐字稿

Greetings, and welcome to Ark Restaurants Fourth Quarter 2019 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, Sonal Shah. Thank you. You may begin.

Thank you, operator. Good morning, and thank you for joining us on our conference call for the fourth fiscal quarter ended September 28, 2019. 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; Vinny Pascal, our Chief Operating Officer; and Anthony Sirica, our Chief Financial Officer.

For those of you who have not yet obtained a copy of our press release, it was issued over the news wires 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 home page at www.arkrestaurants.com.

Before we begin, I'd like to read the safe harbor statements. I will 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 today. First, I'd like to just go over generally how we're doing in all the venues where we have operations.

Las Vegas is doing very well. We're comping decently, and I think profitability was up a little bit from the same period last year. Alabama, we're doing extremely well. Our sales continue to improve. We're comping more than nicely there. Florida, the same situation. I'll get to what's going on with food courts in a few seconds and with the acquisition of JB's on the Beach. But Shuckers and Rustic continue to perform better than our expectations. Sales are up in both. Profitability is strong. We'll deal, as I said, with food court in a second and JB's.

Washington, D.C., Sequoia is improving, still not living up to our expectations. The event business is picking up, which has had lagged badly. A la carte business seems to be up slightly, but we do see continued improvement and profitability. This coming year should be stronger than last year, significantly stronger.

New York, we're doing well. We've been hurt by minimum wage increases for tipped employees. As I've said before, in the last 3 years, the wages to minimum -- the minimum wage to tipped employees has gone up nearly 100%. So that squeezed margins. For the first time, we think we have a little bit of price elasticity, not in relation to how the economy is doing, but in relation to what other restaurants are charging. Menu prices in New York are just in their own bubble. We don't think we're there. We -- but we do have room to go up, and we've done so on a couple of our menus. So hopefully, those price increases are met favorably by customers, and we're getting with all of relief from these wage increases, and hopefully, our margins will be a little better.

We had a couple of significant events this year. The first is the food courts in Tampa and Hollywood at the Hard Rock Casino. In Tampa, the food court was closed for roughly 3 months for renovation, which is in line with the new type design criteria that was put into place by Hard Rock. They paid for some of our expenses, reimburses of expenses that we had ongoing like insurance and some key man salaries. But during that 3-month period, we lost money. It's now reopened. Our profitability seems to be a little bit better, sales seem to be a little bit better.

In Hollywood, we didn't have to close, but we were moved from one location to another location. The renovation and expansion of the Hollywood Casino was, I'm told, $1.6 billion in capital spent by Hard Rock. We were moved to a location that has turned out to be much better in terms of revenue and profitability than where we were before. We did not have to close. We moved -- the same day we closed the old location, we moved into the new location. There were some sort of preopening expenses of doing that, but we are doing far, far better than we were in the prior location.

Also, in Florida, in May, we acquired JB's on the Beach in Deerfield Beach, Florida. It sits on the sand with great views of the ocean. It's about 300 seats. We are doing right now better on a revenue basis than they were doing before our acquisition. We're comping pretty well. We do not have significant profitability yet. We bought it just in the offseason. The season starts about December 26. They make most of their money between that period and Mother's Day every year. The rest of the year, it trickles in. But our expectation is we're going to do really well. I think they have benefited from our knowledge stream into the restaurant, and that seems to be going well.

There are certain things we should talk about. The first, I think, is noncontrolling interest accounting. Anthony, would you please brief everybody on that?

Sure. If you saw the press release in the current quarter, and here we had losses attributable to nonperforming interests. We have 6 entities that we do not own a 100% of. So in doing the accounting, we have to allocate losses for those entities. Included in there is Clyde's, which as you see in the press release, we took a significant write-down on the long-lived assets, as well as the Florida food Court partnerships, which we do have income from for the entire year. There are a couple of smaller partnerships in there, but nothing of significance.

Yes. When Anthony says all the entities and he said we took a significant write-down on Clyde's and then he said as well as Florida entities, he didn't mean we took a write-off on the Florida entities.

No...

They're included -- he means they're included in that grouping.

Clyde's, we don't want to get into fights with our auditors. They thought that the asset was impaired. It is by strict accounting rules. So we wrote off the long-lived assets. The lease in Clyde's has significant value in it, which does not offset the requirements for impairment. We're working on Clyde's. Clyde's used to be profitable. After 3 increases to, again, minimum wage tipped employees, it has significantly impacted the profitability of Clyde's. I still believe it could be a profitable situation, but we'll wait and see and give it a little time. And if it doesn't work out, we'll see what we -- what values we can extract from the lease.

Meadowlands, there's nothing new to report in terms of getting a casino license. We still maintain, in our own minds at least, that when New York starts to issue licenses for downstate casinos that New Jersey will have to react. We think that Atlantic City is still struggling. That's factual. We think once the downstate casinos come into place in New York, those Atlantic City casinos will suffer. There's a new casino being built in Philadelphia. We think that also impacts Atlantic City. Meadowlands is ideally positioned, and it's proving itself with sports betting and also our partner. We're doing on-site at the casino at the Meadowlands Racetrack, hopefully, casino. We're doing on-site about $10 million a week in gaming and betting. The hold on that is better than we expected.

So the 9 months, the Meadowlands showed a $6 million profit...

EBITDA.

EBITDA, excuse me. Anthony is correcting me, a $6 million EBITDA. We expect that will go to $8 million to $9 million to the year-end. We're on a different year than they are. We have roughly a 10% interest. We do not -- so we're expecting somewhere between $800,000 and $900,000 in our K-1 income. But obviously, because we're a minority shareholder and because accounting works the way it does, we're not -- we can't show that income unless it's distributed. We know, this year, we -- originally, we told we were going to get some distribution so that we don't have phantom income on which we're paying taxes. The Meadowlands' general partner has decided not to distribute this year. We have no way of knowing what the situation will be next year. But there is that income flow that will eventually arrive at our doorstep. I just can't predict yet when that will start to happen.

The 2 other issues that we've been speaking about are our Las Vegas lease, which has roughly 3 years remaining, and the status of that and the status of our Easton, Ohio project. With regard to the Las Vegas leases, that's a -- those are important leases for us, New York-New York. We have had a significant meeting with MGM on which we have agreement as to what they're looking for. We will be sending them a proposal in the next couple of days. I think we're going to be in good shape there. But we're dealing with new people. MGM has had significant changes in upper management. So we've never negotiated with the people we're negotiating with presently. But it seemed very favorable. So it's too early to make any comments other than we had a very good initial meeting. I think over the next 6 months, we'll know the conclusions of our proposal and how they feel about going forward.

Ohio, we made a very aggressive statement in the last conference call, where we said, over a period of time, we would be looking to build 10 to 20 restaurants with or without partners in Ohio. We have so far identified 3 spaces with 3 concepts that the management of Easton is comfortable with. We have not signed any leases yet, but the first lease will become a template for every other thing we're doing going forward. The lawyers are sitting down, fine-tuning that lease right now. We expect in the next couple of weeks to be signing our first lease there. And the other leases should flow pretty quickly on the other 2. We hope we will not have any impact this year on our P&L. Those operations, by the time we do architectural drawings and engineering and schematics and then finally get into construction with permitting, I don't think anything will be open until next September at the earliest. And that's one concept. The other 2 will follow that, and we'll see what we're doing going forward with additional concepts. But right now, I think we've secured 3 concepts that we're very excited about.

The other thing I'd like to mention about the JB's on the Beach, again, you're going to see the performance of that how we do in our March quarter numbers. So it really didn't have any impact in our year-end. Anthony, correct me, maybe there was a couple of hundred thousand dollars in EBITDA there.

$150 million, excluding the legal fees.

Yes. So $150 million excluding the legal fees. So it did nothing in terms of impacting our EBITDA for last year, but it should have meaningful results in next year. All in all, I'm going to go out on a limb and give you some guidance. We were up 20%-plus from last year in EBITDA. I think we'll be up another 20% this year the way things will look, so hold me to it. Any other questions, please come forward.

Oh, excuse me, before your questions, capital expenditures. Rustic Inn, there was an old barge as part of the seating at Rustic Inn. We have spent somewhere near $1 million to build a new barge. The new barge sort of expands seating a little bit, but it adds an outdoor bar, a rooftop bar on top of the barge, which overlooks this sort of working canal, recreational canal that we [are part to]. So we'll see if that further increases revenue. I'm amazed at the demand for that product. The product is great. There are 2-hour wait when there are supposed to be 2-hour waits. I think we'll pull extra revenue out of it, but it was $1 million capital expenditure.

Obviously, as we go forward with Ohio, the tenant allowances are very strong, but we'll probably have, per restaurant, somewhere between $750,000 and $1 million into each restaurant. So by the end of summer, we'll start to spend some of that money for the December opening. So our cash flow will be strong enough, sufficient to handle that. Unless we make an acquisition, I don't see any more borrowings this year. We're constantly looking to find more deals like Rustic and Shuckers and the Alabama deals where we have owners who are getting along in age and don't want to own the restaurants anymore. And we can buy not only the restaurants, but the property. But unless we find one of those, I think our capital expenditures will be confined to whatever's left on the build-out of the barge, which is not very much, and the Ohio projects. So free cash flow should be pretty good this year, right? Now please questions, if anybody has any questions.

(Operator Instructions) Our first question comes from Bruce Geller with DGHM.

Congratulations on some nice progress. I have a few questions. I'll start with the guidance you gave. I'm assuming that plus 20% is against the adjusted EBITDA number for the year, not the number that includes the impairment charge?

Right. Exactly.

Okay, great. Then moving on to Clyde's. You mentioned the lease and the value of the lease. You've struggled there almost since day 1. At what point do you move on to just trying to monetize the value of that lease and move away from operating a restaurant that's just taking up a lot of time and attention, but not really generating any earnings?

I think we've got to make a decision within the next 12 months. We're trying some stuff there. The problem -- again, we were modestly profitable, not a great deal of operating profit, but modestly profitable until we got hit with these minimum wage increases...

So much.

Yes. Also, the construction at Hudson Yards really blocked 10th Avenue. So if you were coming from the south to north, even walking, this was problematic. You had to go from one side of the street to the other back and forth around construction. The whole of 10th Avenue was tied up dramatically for traffic. So with Hudson Yards being open, we expected to see a benefit for a while. We had a little bit of a benefit, but now we think Hudson Yards is competing directly with us for demand in the area. But there -- when Hudson Yards is fully occupied, we think that there should be further demand beyond the number of restaurants in Hudson Yards. And as Hudson Yards moves further north, because construction continues, we think those customers will come closer to Clyde's, but we're not going to sit with it forever just to prove the point. That lease is roughly 60% below market.

We have -- it goes into, I think, 2032 or something like that. So we have 13 years left on the lease at 60% below market, it's 10,000 square feet. We think market is north of $100 a foot. We not only think we can validate it with other leases being signed. In the U.S., we're at $40 a foot. So we have $600,000 of value discount from market times 13 years. So give me a discount number. The leases were something in the millions. So we'll find out. That lease and the underlying property on the restaurants we own, Shuckers, Rustic, the 2 Alabama properties, the resorts and all that in Alabama don't show up on our balance sheet in an appropriate manner. We think those assets [hold in] worth more than what they're on our balance sheet for us. So we'll have to figure out at what times to try to monetize that lease.

Yes. I mean it sounds pretty valuable. It would be great to monetize that, take the cash and go find another JB's?

Absolutely.

Okay, great. Moving on, I wanted to ask about Ohio. It sounds like you're investing some capital there, which sounds like it might be a little bit of a departure from what you've discussed in the past, where you would not be putting up much of the capital. Has the ownership profile of the restaurants changed? It sounded originally like it was almost more of like a consulting arrangement. But now it sounds more like you're making direct investment and will be directly running the restaurants.

Some of them, we will. We're hoping to be a coordinator for other restaurateurs who have interesting concepts that can up the game at Easton. There are 52 food service providers at Easton with 30 million people coming in a year right now for the retail and the restaurants. As we said, the restaurants are dull and pretty much uninteresting. So the Easton owners are trying to up the game. We don't think we can do that on our own, but we need to seed it with better architecture and design and better quality products and concept.

So these first 3 are really to do that, to show other restaurateurs that they could be highly successful in that environment and take advantage of our management team to help them open up restaurants and provide them with HR and purchasing and other aspects of restaurant operations that they might not be capable of doing in Easton because they're used to being in their own environment and never traveled the restaurants before. So yes, it's both. We've always maintained this both. But if there are 20 restaurants out there, I don't expect that we'll own more than 5 or 6, and the rest, joint ventures or licensing deals or something other than us having direct ownership. The capital we're spending is not significant in relation to what Easton is providing. And I think at any given time for any one restaurants that we have ownership in, we're only going to have about 30% of the capital commitment required to open the restaurant. So Easton is being very generous.

Great. Well, it sounds like you're in an excellent position there. Just one last question on the minimum wage. Is there another step up in the coming year? And to what extent do you expect that to impact your operations, specifically with respect to the EBITDA generation of the New York restaurants?

So the -- there is no legislative step up coming. The real question now is whether a liberal democratic-controlled legislature of New York State decides to get rid of the tip credit. Now right now, the minimum wage in New York City is $15 for all workers, but we're allowed to use $5 of the tip credit of the tip that our tipped employees receive $5 an hour towards the minimum wage. So essentially, we're paying roughly $10. If they eliminate tip credit and say, "Hey, these people that are making $40, $50 an hour shouldn't have to contribute from that $40, $50 an hour towards their own minimum wage," that would be impactful in New York, probably cost us in excess of $1 million, not $2 million, but somewhere around $1 million, $1.5 million. Whether you can recover that with price increases, I wouldn't bet you could.

Again, pricing in New York is in a bubble. I go to restaurants other than our own, I am amazed at what people are charging in those restaurants. If the concepts are right, you still get the same answer when you call for reservation. We have time at 5:30 and time at 10:30. It's crazy. And Bruce, as a New Yorker, I think you know that. We have an umbrella of safety in terms of we think we're more efficient than most restaurants and are buying. We have 40 years of experience. We have managers who have been with us 30 years. They watch every dime. We're conscious of how to be efficient. So we've always been kind of feeling good about our pricing.

We recently tested some price increases in Bryant Park where I just said, screw it, I'm going up a little bit here because we have a 2-hour wait to lunch. Crazy that sounds. You just can't get a table at Bryant Park for lunch and most nights at dinner and certainly (inaudible). So the question is, where do you stop the price the end of the line. And if you price the end of the line, the line is going to start to disappear. So where can you take advantage of this demand a little bit? And so far, it seems to be working, that we've gotten a little bit more. But if they eliminate the $5 tip credit, I don't think there's enough elasticity in menu prices to accommodate that. Maybe you can get a little bit more.

We're also facing an amazing amount of competition, I think, the restaurant industry as a whole from delivery services. That's got to be factual. And you have to look at those prices also, and say, what's delivery charging and how close is it to what your menu looks like and can people buy that at home for less than going out. And so that sort of puts a little bit of cap on things. I'm not so concerned about it, but it does influence our pricing ability. And if they eliminate the tip credit, I think that's harmful. So far, it seems to be table for now.

There are -- the House of Representatives, democratically controlled, passed a $15 minimum wage bill, which the Senate did not take up. I think the 2020 election, if the Senate were to flip, that might be taken up. There's a lot of evidence, especially in California and Seattle, Washington, where there have been a lot of restaurant closings because the minimum wage in Seattle now is $16.83, I think that's the number. Restaurants are closing. California restaurants are closing. The argument that the people behind the legislation in the House of Representatives for the $15 minimum wage, they're saying it's working, that restaurants are not closing at this price elasticity. The statistics are very much different than what they're saying. So I think there's enough of that out there that New York State is wary of it. I think in Maine, they passed a minimum wage bill that eliminated the tip credit. They put it right back about a year. They've seen significant impact on small restaurant businesses. So I'm not -- for the next year or 2, I don't think there'll be an elimination of the tip credit. So I think we're all right there.

The next question comes from [Robert Neider], a private investor.

Well, you had mentioned that, at least as a general comment, that Atlantic City might be suffering from some new competition. How does that impact our presence in Atlantic City?

Good question. So we have in the Tropicana a Burger Bar that is suffering a little bit as Tropicana suffers. We're still profitable. We have still significant term on that lease. We have not gone back to try to renegotiate that lease because I think everybody -- all the restaurants are suffering. And I think as other restaurants start to talk the ownership, maybe we'll have an opportunity to talk to about ownership. But it is not and has never been a significant contributor EBITDA for us. So we continue to operate there and make a few hundred thousand dollars a year, but it has never been a significant contributor. I might point out that when we took that lease, the tenant improvement allowance from Tropicana was significant, and we don't have a lot of capital tied up in that. Resorts, we operate Gallagher's Steakhouse. That lease terminates in February...

March 31.

March 31. Thank you, Anthony. We have signed an extension for 1 year of that lease at a very favorable rent. We will be profitable. Again, it's not a significant impact on EBITDA. It hasn't been for a while. It used to be. But Resorts is very committed to keeping Gallagher's there and the Burger Bar that accompanies it. So we're in good shape there. I don't think there's any reduction in our -- in the EBITDA contribution that those 2 properties inside Resorts will have on, the current EBITDA profile that we have mapped out. So we're doing fine. But in both cases, especially in Resorts, it's a renegotiated lease for a 1-year extension. And in Tropicana, we're going to suffer a little bit, but not significantly.

(Operator Instructions) Our next question comes from Jeffrey Kaminsky with JJK Consultants.

Congratulations on another excellent quarter. A couple of questions I had have already been asked and answered. One was on Ohio, the other was on Clyde's. But a few other things that I'd like to get some information on. You seemed a bit frustrated in your commentary today on Meadowlands. One -- the comment you made was about not getting a distribution you would hope to get. And obviously, legislation in terms of gambling is a long process, but probably longer than we had really hoped and hoped that this is resolved by now. Where do you stand in terms of that? And then secondly, an unrelated question, I'll ask them both at the same time. You just mentioned in your commentary something about delivery services are starting to impact restaurant performance around the country. But if I'm not mistaken, you're considering sticking a toe in the water in terms of deliveries, perhaps utilizing excess capacity. If so, I was wondering how that's coming along.

So let me answer the first -- the second question first. I'm more concerned about delivery, not in terms of customer accounts for our restaurants. Our locations in New York, Bryant Park, Robert, especially our unique locations, the density around Bryant Park, it provides more demand than any restaurant deserves to have. So delivery services out of Bryant impacting Bryant Park is not even on our mind. What's on our mind with delivery services, the pricing that restaurants that do delivery of -- what the customer is getting at what price point and how that impacts elasticity in our own menu pricing. So that was that comment. Robert, again, that's a unique stage for you -- for those of you who haven't been to Robert. It sits on top of The Museum of Arts and Design on the ninth floor with amazing picturesque views of Central Park and the upper portion of Manhattan. So we don't compete because of these services to clients.

Clyde's, we do, do some delivery. For some reason, it just doesn't take off. El Rio Grande, which reduced some delivery, we do pretty well at Rio Grande with delivery. But again, the margins for restaurants on delivery are not that great. And when you talk about excess capacity, we have no excess capacity, at least in Robert and Bryant Park. And much of the time, we don't have excess capacity in El Rio Grande. So the idea of delivery services is to take excess capacity and say, "Hey, you have a labor force there anyway, you need a chef. Whether he cooks 1 hamburger or 4, use that guy more productively. Let us deliver for you." But delivery services charge 23% now on average. I think that's the number. Unless you make a universal deal like Dunkin' Donuts or something. But if you're an individual restaurant, and we have essentially individual restaurants, although it's a corporate entity that has more than one restaurant, but it's treated as an individual restaurant.

And then it becomes the question of the 23% delivery charge, you're -- you still have the food cost involved, you have packaging. And by the time you start -- and the question is, what product are you delivering to the customer. I have a bad conventional wisdom about this. I don't eat in restaurants where I get delivery from. And the reason for that is if I get delivery from them, it always falls short. It always falls short of my expectation if I eat in the restaurant. So I think delivery service is bad advertising for our restaurants. We do it, but we're not so sure we should be doing it for whatever margin there is in that business. So it's perplexing to us. More and more you're seeing these ghost restaurants, which don't have tables and chairs and just do delivery. That seems to be the more efficient way to do delivery in terms that there is no bad advertising for the restaurant seats. It's just delivery. And I think you're going to see the world go a little bit more toward that. So that's my take on it. I don't think it would be impacted heavily, probably not at all by delivery, except that it impacts how we think about menu pricing. So that's the first question -- that's the second question.

The first question, Jeffrey, is Meadowlands. Look, we think the odds of this happening are very, very good. We thought that when we made the investments some 4 or 5 years ago, we thought the time line at that time would be 5, 6 years. We were surprised when a referendum was introduced in New Jersey legislature in the second year of our having this investment. That referendum failed. As you know, there has to be referendum passed by the legislature and then voted on by the public to change the New Jersey constitution to allow the gaming in the north. I think the telling sign here is that the Meadowlands has become, I think, the largest sports betting venue in the United States, not that every state has sports betting. But right now, we're doing $10 million a week. It's more than all the casinos in Atlantic City put together.

But those are totally online.

And yes. And Anthony makes a great online footfall there. The online that goes through the Meadowlands website is far greater than what we're doing on-site. So we're well above $1 billion in sports betting attributed to the online side of the Meadowlands and beyond site betting at the Meadowlands. So I think that's a good indicator where you can see how we should land in New Jersey. The other thing about the Meadowlands that's a great advantage is that the building exists. It was built to hold the first phase of the casino operation. Hard Rock is our partner. They have a license to do gaming in Atlantic City. So they're not going to have any resistance to a license in the Meadowlands if it's permitted as a casino license. We don't -- and every other site will be a site where there has to be engineering done and environmental studies. You have to go through townships or cities approvals. There's sure to be advocacy groups against it. The Meadowlands is a huge area that doesn't have any residential around it. So the ease of getting into operations should be very attractive to a state that's in entire need of additional funding. The studies that have been done by MGM and Hard Rock indicate that this could be one of the busiest casinos in the world, if it's allowed to happen. You could be giving New Jersey more tax dollars based upon projections and the 7 casinos in Atlantic City put together. So I think this is the place. We'll see. But I don't think anything is going to happen until downstate casinos come to New York.

There are no further questions. At this time, I'd like to turn the call back over to Michael Weinstein for closing comments.

Yes. So I think the December quarter, we'll start to be telling -- the March quarter should be really telling us how we're doing here. But we're very optimistic and excited about our current business and what we see going forward, especially in Ohio and JB's and the improvement in Sequoia. I think we're on a good path here. So thank you. We look forward to speaking to you after we report the December numbers. Have a good holiday, everybody.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.