Ark Restaurants Corp (ARKR) 2022 Q4 法說會逐字稿

Greetings and welcome to Ark Restaurants Fourth Quarter and Year-end 2022 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christopher Love, Secretary for Ark Restaurants. Thank you. You may begin.

Thank you, operator. Good morning, and thank you for joining us on our conference call for the fourth quarter and year ended October 1, 2022. My name is Christopher Love, and I am the Secretary of Ark Restaurants. With me on the call today is Michael Weinstein, our Chairman and CEO; Anthony Sirica, our President and Chief Financial Officer; and Vinny Pascal, our Chief Operating Officer.

For those of you who have not yet obtained a copy of our press release, it was issued over the newswires yesterday and is available on our website. To review the full text of that press release, along with the associated financial tables, please go to our homepage at www.arkrestaurants.com.

Before we begin, 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. Thank you.

Hi, everybody. Thank you for joining us today. The comparisons of the September quarter this year with the September quarter of last year are affected by 2 segments of our expense side. One is a substantial increase in payrolls and the other is a substantial increase in occupancy costs. In order to try to get the flow of the business correctly stated of where we are.

I want to first have Anthony explain occupancy costs and how the September quarter this year compares to the September quarter last year, what were the big differences because there were adjustments last year, which sort of inflated EBITDA in the fourth quarter. And there are adjustments this year, which sort of deflate our EBITDA in the current September quarter.

So last year, we had adjustments related to the finalization of some COVID abatement deals that were recorded in the fourth quarter. So what happened was there were several landlords where we were negotiating -- still negotiating COVID rent abatements in 2021. So we were still accruing the normal base rents the whole time because according to the accounting standards we couldn't record any abatements until we had signed deals. Those deals were signed last year in the fourth quarter. And hence, they were recorded, which reduced occupancy last year by about $800 million to $1 million.

In the current year, we also had some adjustments to occupancy costs related to the Vegas leases finalized in July and August for percentage rents that needs to be accrued back to the beginning of the year based on the final deals. So all in all, you're probably looking at $2 million swing between those 2 items. And that's why the occupancy looks so odd.

So basically, last year, we reversed an accrual of rents for the full year of our fiscal year 2021 in September, which created a $1 million increase in EBITDA essentially based upon that accrual. This year, the opposite happened because we didn't have signed leases in Vegas, we weren't allowed to approve for the full year as the year was going on until the leases were signed and essentially those rents for the full year because we had to go back to January 1st, of 2022, we're about $1 million that fell into the fourth quarter. So there's a $2 million swing here.

I'd like to address payroll costs. That's the other big item. Payroll went up roughly $2.8 million compared to last year's September quarter. What's interesting is the payrolls now as a percentage of sales of mirror what was our pre-pandemic percentages on sales in the same quarter before the pandemic and year-end. So we're back to essentially full employment.

I may have made a mistake. As labor started to loosen up my directed to all my managers was because we couldn't find good people. We were having trouble finding good people for these restaurants. We were having a lot of turnover. We would hire people, they would leave after 3, 4, 5 weeks. It was a mess. And as the market opened up a little bit, especially in Vegas, and I want to talk about that a little bit more. The directive was to just find the right people.

And if we have to pay them more, which we're going to have to pay them more, just get them on board. That stood us very well in 2008, 2009 when things got very rough for us. We said that our customers were going to have a tough time spending money in restaurants when the economy was really tanking. And the last thing they want to do is if they spend money in a restaurant is see bad service because we don't have enough people to service them. So basically, we don't want to be in that position going forward.

And the market started to ease up with good people to fill these jobs that have been vacant or jobs where we didn't have the right people out and hire, and we're paying. But in the end, we're back to pre-pandemic levels. So the September quarter, essentially, our sales increased $4 million. We had this $2 million swing from the September quarter last year in rents. And we had a $2.8 million swing in labor cost. So that sort of will get you to where the different -- the major differences were and how they occurred.

In terms of our business, the September quarter, we were not raising prices aggressively at all. And in many of the restaurants, we just stopped. We don't know -- it's in our form to try to figure out what the elasticity of pricing could be in some of these restaurants. But we're at prices that are sort of special when you've been in the business 50 years, sort of unfathomable to me even though they may be rationalized by the cost, it doesn't mean that the customers are going to look at them and feel comfortable paying them.

This is especially acute in Rustic Inn in Florida. We're now serving a 2-pound order of King crafts [ph]. I always go back to this as an example. It cost us 85% of the sales price to put that on -- to put that dish out, we're charging $135 for it. It used to be a $75 dish. I would tell you 1 out of the 4 people who go to the Rust again, go there for that dish. It used to be a 50% food cost, but a high dollar profit.

Now it's an 85% food cost. And the fact of the matter is, even though Romo (inaudible), our customers can afford it. They're now sharing it. People are not coming as frequently for -- we have a blue-collar crowd there. And it's just becomes a celebratory when people have anniversaries and birthdays but we're losing headcounts there. Our business in the September quarter was down some 20-plus percent in Rustic, and that sort of had a big impact on our EBITDA as well. That's an extraordinarily profitable restaurant.

The rest of Florida, we're doing fine. Our food courts and the 2 hard rocks performed well, JB's, Blue Moon, Shuckers all performed well. Alabama performed very well. Las Vegas performed very well. New York is performing well because of significantly increased events and price increases that we put through to people having events, which have been readily accepted. There seems to be a big pent-up demand for events in New York and Washington, D.C.

So the business is fine. We did $4 million, as I said, an increased sales. The 2 big items which need to be understood as to why the comparison looks significantly different between last September and the September's quarter are rents and those reversals of accruals last year and the increased accruals this year and labor. I think we're in very good shape with labor now. I think we're going to get more efficient with labor as we hire better people. I think the headcounts of the number of employees we have will sort of go down because in many cases, we had 2 people doing the job of 1 person. We had a lot of overtime. That's going to start to be eliminated. So I think we're going to become more efficient.

I'll open it up to questions now.

(Operator Instructions) Our first question comes from the line of Paul Johnson of Private Investor.

Thank you for the explanation around those numbers. So I guess, the tricky thing is to try to predict what is sort of a normal level of payroll and occupancy costs. And so I'm wondering, I know you don't give forward guidance, but all things being equal going forward for, let's say, the next fiscal year, do you think that we should be using this level of EBITDA, let's say, going forward, again, obviously not predicting what can happen to the economy and traffic and all that, but all things being equal, would you say that the payroll and occupancy costs incurred over the last fiscal year are what we should be modeling going forward?

It's a tough question. I can't -- I think there's one thing that we all have to be aware of. Our business in Vegas has been extremely -- we have new management in place in Vegas. They were not left -- the new management was not left with the best of circumstances. There were holes that we could not fill last year in Vegas, 2 new hotels came on board. They required 8,000 people in the labor market that was impossible to start out with. What covered up are struggles and helped us dramatically was this boom and acceptance of higher prices in Vegas when we did put through price increases.

My one concern is that level of sales sustainable. There's a lot of reasons to think it is. Conventions are coming back. The T-Mobile Arena, which is right next to New York, New York, where most of our sales in Vegas come from, is more active than ever between hockey games and concerts. There's a football team there now. There's an NBA team scheduled to come in. So we think the sales should be continue at these levels. But I must say, between price increases and added customer counts, our Vegas business was up 15% from the year before.

As long as that's sustainable, I think the level of earnings that we had for the year this year are probably sustainable. I expect, I honestly expect New York to continue to perform well. Sequoia in Washington should perform better. I don't see any reason for Florida to do anything but continue to do its current levels of volumes. And there's a big hole in missing in Rustic EBITDA. That restaurant used to $3.4 million in operating cash flow. It's down to 1.6% annualized. So the $14 million number that -- of EBITDA that we did this year, that's a big hole. $1.8 [ph] million of that $1.8 million is missing from Sequoia, not Sequoia again -- excuse me – Rustic Inn.

So I think that should do hopefully better at some point, maybe not immediately the Vegas numbers had a onetime $500,000 of retirement payment for Paul Gordon, who retired as General Manager. So there's some -- that's a true onetime expense item with Anthony could speak -- we're paying down the term loan with our bank maybe, Anthony, should speak to the balance sheet for a second. But we're paying down a term loan and exchanging that for a credit line for the same amount. That will save us $400,000 of interest charges. Right now, Anthony, if I'm correct, we have about $28 million, $29 million in cash in the bank.

Yes.

What's the debt?

23.

$23 million in long-term debt. So plus $5 million there. We're in a strong position to make acquisitions. I actually see the $14 million number as a base, if that's an answer as opposed to being at risk. I see that as a base and hopefully, we could get beyond that.

Can you just give an update on the Meadowlands?

Yes, I'd be happy to. It's a repeat of the last update. We definitely think the Meadowlands will be the site for a (inaudible) in Northern New Jersey for a variety of reasons. Number one, the racetrack already has bedding going on and types of advantage. The sports betting at the Meadowlands is, I think, has been the largest single U.S. site for sports betting, although there's been an encroachment with online bedding in New York.

We're still doing very well there. The drop-off has not been as significantly affected as we would have thought the whole thing is permitted for environmental and other things that other sites would have to go through. We're not in a neighborhood that we would get residential lawsuits. So we think if New Jersey wants to start to get tax money from the operation of Casino, where we would literally be 90 days away if it was approved from having a casino operation, literally, the racetrack was designed with that in mind.

The whole theory about getting this passed by the citizens of New Jersey because it had -- they have to change the constitution essentially to a referendum would be to have New York casinos operating downstate, which means Yonkers Long Island and perhaps even in Manhattan. There are 2 groups buying for 1 of the 3 licenses in Manhattan. If those licenses are issued and/or if they start building and operating, certainly, Yonkers and Aqueduct could operate right away.

And New Jersey recognizes that there is a flow from New Jersey to those New York casinos. We think that's the time ideally to get this referendum passed. So that's the plan. Murphy is very -- government in Jersey is very favorable client. He has said that to having a Northern Casino. The only thing we don't know is what that referendum would look like last time, the referendum looked required that the casino be operated by some company that is already licensed in New Jersey, which will be one of the Atlantic City operators.

At that time, when the first referendum, which was not going to pass, Hard Rock did not have a casino in New Jersey. They now do. They run the old Taj Mahal and they are partners in this venture. So I think nothing negative has happened, and there's positive circumstances are that we still do a lot of sports betting on site and the New York casinos are moving forward. So I think that all plays well into our hopes of getting a casino license.

And just finally on that, I know you've mentioned in the past that the logical conclusion would be for someone like Hard Rock to buy us out. Some people have speculated that the value that they would -- at the price they have to pay is almost equal to the whole market cap of ARC. Is that within the realm of possibility from your point of view?

I won't accept a number equal to the capitalization of I think it's worth much more. Look, I'm not speaking out of school here. When we were looking for partners when it looked like the first referendum was going to come to fruition, which it did and it was voted down because it was badly written. It sounded like the state had to put up the money, which was not true. There was no mention in the referendum of where the tax money was going to be allocated to whether nursing homes or education, it was just fluff.

But we did have a conversation with MGM about because even though Hard Rock was our 20% partner in the deal, we needed a licensed operator in Jersey to operate in the north. And MGM gave us projections that this thing would do $500 million a year after paying taxes and cash flow. So we own -- almost 8% of this thing fully diluted. There would be more dilution if we couldn't come up with our percentage of equity. So even if we own 4%, that's $20 million of cash flow that you could attribute to Ark's interest. We also have an exclusive on all the food and beverage with the exception of the carve-out for Hard Rock Cafe. That's probably a $50 million, $60 million business for us.

So the potential economics are extraordinary, but first, get me the casino license. I mean we don't have that. I don't know what -- I don't know what that's worth. But certainly, I don't think it's priced into the stock.

(Operator Instructions) Our next question comes from the line of Jason Walters a private investor.

Quick question on acquisitions and capital allocation. I know, Michael, you like to purchase companies for 3x to 5x EBITDA depending on whether you're getting the land included. And Ark's trading at that level or below that level. Any thoughts on share repurchases, A And then B, what are you seeing in terms of opportunities on the acquisition side?

Well, thank you, and I'm glad you got it right. The 3x to 5x, depending upon whether the land comes with it or not is absolutely correct. So we're constantly looking. We've seen a couple of interesting things. There are ongoing discussions, one of them further along than the other. The philosophy here would be we would rather acquire cash flow, which would be hopefully long-term consistent cash flow than reducing the number of shares. We think we're better off acquiring assets as opposed to share repurchase and the another influence, which we don't even think about, but you should think about is the already the liquidity built into our capitalization. We just don't have that many shares outstanding floating around.

I mean I could tell you with 60% or 65% of the float is right now, and it's not leaving those hands. So we just don't have enough shares outstanding. That's a bad thing because somebody that wants to buy it has to find moments like this when the stock is down and maybe there's a seller. But also, it's a bad thing if you want to sell a stock, there's a block comes up is not necessarily a buyer available. So we just don't want to shrink the shares anymore.

But that all being said, was still much better off buying stuff at 3x to 5x with either lease positions where we have 25 years left on a lease if it's a lease or if we own the land, it's forever. We're confident enough that we know how to run these things that the cash flow from an acquisition should be long-lasting. We've been very lucky in the past and make no mistake, there's -- I think we made smart acquisitions, but the luck involved has been that every Chef and every Manager of every restaurant that we've acquired has stayed with us. It's extraordinary.

I think we're a good company to work for, but to have nobody leave and have all that expertise remain. I'm not so sure, we'll be as fortunate going forward, I hope so. But that's a big issue with us as well and slows us down and jumping into acquisitions. We've got to make sure that we have management in place that we have a good chance of retaining. So I hope that answers your question.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you. We're working hard here. We really are. Hopefully, things continue to improve for us, and we'll speak to you the next quarter. And I appreciate your participation and the question is very good today and it gives me a chance to explain the business a little bit better. Have a good day. Happy holidays everybody.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.