Ark Restaurants Corp (ARKR) 2023 Q4 法說會逐字稿

Greetings and welcome to Ark Restaurants' fourth quarter and fiscal year ended results. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce Christopher Love, Secretary. 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 fiscal year ended September 30, 2023. 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.

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 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.

Before I start, I want to bring in Anthony, our CFO and President, to talk about our balance sheet and the write-off of the goodwill to try to give you better explanation.

Good morning, everyone. Our balance sheet at year end continues to be strong. Our cash position was about $13.5 million. Currently, it's probably tracking a little higher than that. Our debt is $7.2 million compared to $20 million-some-odd last year -- $24 million last year. As you might be aware, we paid off about $16 million of our notes late March, early April with our new credit agreement.

The only other significant change, as you read in the release, was a goodwill impairment of $10 million. As we got into the quarter close, we realized that there was a triggering event related to our goodwill assessment due to the decline in the stock price and the upcoming expiration of the Bryant Park leases and the related RFPs that were issued for the spaces.

So as a result, we performed a quantitative assessment based on the income approach, utilizing a discounted cash flow analysis. The analysis took into account the estimating future after-tax cash flows, discounting them back to present value, and the possibility that the leases may not be renewed. So given all that, we also consulted with third-party experts. The impairment came up to about $10 million. And that's really the highlights of the balance sheet. The P&L, Michael is going to talk about.

Yeah. So the EBITDA for the year -- and I'm going to get to the larger elephants in the room in a few seconds. But the P&L for the year or the EBITDA for the year was about $9.6 million. I would say pretty much on the conservative side, the redo of Gallagher's, in addition to the capital and improvement, cost some $2 million, probably cost us some $1.6 million, $1.7 million in cash flow.

The reason for that is that our deal going in when we redid the leases at New York, New York, is we agreed that even during the refurbishing periods, we would continue to pay rent. And in addition to paying rent, we were paying full payrolls, insurance premiums, everything related to the cost of operating a restaurant with the exception of the purchase of food and beverages.

So food and beverage costs at Gallagher's run at about 30%, 32% between the closing and the slow uptake on revenue. When we reopened, there was about $2.2 million, $2.3 million in missing sales. Gallagher's is actually now presently, at least this month, performing better than it ever performed. So we think the refurbishing is working in our favor in terms of revenue.

But during that period of time, I would put a number here of [15, 16, 17], something in that area of lost cash flow. So the $9.6 million in EBITDA, if we had not closed Gallagher's, conceivably could have been $11 million-plus.

We suffered dramatically the last four months and continue to suffer with sales at our full-service restaurants in Southern Florida. That means JB's, Blue Moon, Shuckers, and up until recently Rustic, which is now revenues are on pace with the prior year. But in the other three, we are down 10%, 15% on a weekly basis.

And it continues. Our Hollywood property, which is a fast food facility within the Hard Rock Casinos, has been doing well and comping well. It just got a bump up because we now have table games which were approved by the state for that casino. And we are seeing a pretty -- early on, it is -- we don't know how -- whether it's just a honeymoon period, but we're seeing a bump in sales in Hollywood and a slight bump in Tampa where gaming has been expanded to table games.

Our properties in Alabama continue to perform well. Our Las Vegas sales are very strong. The efficiency in Vegas is up dramatically. We were forced to -- when we replaced management after Paul Gordon retired, we found that we were not strong enough in certain positions. We also had some poaching going on by other casinos down within this year, came after some of our people -- in this particular -- in the Vegas market, payrolls are way up because competition for too few good workers is very keen. So we're having payroll problems there.

New York, our business was very good, continues to be driven in large part by events where there doesn't seem to be price sensitivity. Washington, D.C., we are doing good, but not great. That facility continues to underperform our expectations. We keep working on it.

So all in all, my job is to try to assess how we're performing at the restaurant levels. I think our product is good. Our services are good. I think the people we have running these restaurants are doing an excellent job. I don't see any shortfall in that at all.

If you look at the last couple of weeks, which did not make a year, obviously, we're seeing record sales in New York at Robert and Bryant Park. And we are seeing record sales in Las Vegas. So a lot of the properties are really performing very, very well on the revenue side.

The crimp in all of this is my reluctance to raise prices as much as everybody else is and my feeling that customers will have a negative reaction to these ridiculous prices from my point of view. So we raised prices modestly, and we are facing increased payroll costs -- continue to increase payroll costs everywhere, increased the premiums on insurance, utilities. It's just been a tough period of time to keep margins anywhere near where they used to be.

But in all, I think we're performing very well. I'm sure you are all going to have questions about Bryant Park. As it was disclosed in our 10-K, somewhere in late spring, we were informed that the Parks Department was going to issue RFPs as per their policy for the Bryant Park operations as our leases coming due something in May 2025.

The RFPs came out. They were a bit vague. We got some better color on what they were looking for. And in terms of an RFP response, we responded on --

Late October.

No, November 1. October 26 is when we responded. Yes, it was due on November 1. All we know so far is that we're a finalist in the process. I really don't have very much to say about it. I've been not excited, not unexcited. I think we made a great presentation. We've done a great job for the park.

That restaurant is one of the highest-grossing restaurants in the United States, considering that it's not allowed to do late-night service. We close for reservations on most nights at 9:00 because the park closes at 10:00. There is a requirement that noise levels, because there's residential around it, be kept to a minimum. So there's no such thing as [parking] or a bottle service. And in the RFP, it mentioned that the restaurant was one of the largest-grossing restaurants in the United States.

So I have no indication of where we stand other than we're a finalist in the process. It went out to everybody. And it's been whittled down to a few.

Meadowlands, we continue to be hopeful that there will be a casino license issued at some point. But the plan is -- for New Jersey is that we don't think they're going to make a move. Until New York issues its downstate liquor licenses, we can't figure out what the legislature is doing. But we're in the best position to get a casino license if the state moves to have a casino in the north.

I hope that gives you a little idea of how this business is performing. And I'm open for questions.

(Operator Instructions) [Jeffrey Kaminski], JJK Consultants.

Good morning, everyone, and Michael, Just in reviewing the goodwill impairment test as per the press release, and Anthony mentioned it again a few minutes ago, that there was a triggering event -- singular -- a triggering event. And it follows -- it says due to the volatility of the company's stock price.

I've been doing this a while, from top to bottom in terms of the stock price and the low trading volume stock, maybe high 17s, low 18s to high 14s, low 15s. That's from top to bottom maybe 20% movement in stock. I don't know who considers that volatile via triggering events. So I'd like some color on that.

Consecutively, you include as part of the triggering event, and again, you make it sound the event as if it's a singular event. But you also include that -- the upcoming expiration of the Bryant Park properties and the lease and related proposals.

So what was the trigger? Is the trigger the volatility in the price or was the trigger the Bryant Park situation? And the Bryant Park situation has not yet been resolved. So should it resolve favorably, are you then going to reverse the $10 million goodwill impairment? Could you clarify that? It makes no sense.

Yeah, sure. Well, okay. So the way the assessment works is the first test is you compare the value of your shares, the entity value to the book value of the company. So what you do is you take your shares outstanding at the end of the quarter. It's a point in time test multiplied by the publicly trading price.

For all prior quarters, up until the fourth quarter, our stock was trading above $17.50, $18. And we were covered. Our fair value of the shares was higher than the book value of the equity. At the end of the quarter, the stock was around $15, $15.25, which was still that up until yesterday around that price. And when you did the test, there was a significant shortfall. It was below the book value by about -- I forget what the number was, $6 million, $7 million.

So now you have to go to the second step of the goodwill impairment. The second step is you have to look at discounted cash flows and you have to model it out. And when you start looking at that, you have to take into consideration multiple scenarios. You couldn't just project out that you were going to to keep Bryant Park for the next 10 years. You have to factor in a scenario, a weighted scenario that you could lose it and therefore lose the cash flows associated with that.

And that's what we did. And that's how we came up with the impairment. (multiple speakers)

Had the stock price held, then you wouldn't have had to consider the Bryant Park lease expiration. The triggering event was the stock price vis-à-vis the book value.

Yes.

So the answer to that, Jeffrey, is twofold. Number one, if the stock price is held, we -- once we've gone through this process and then the outside consultants and our own -- J.H. Cohn, who are our auditors, one time had to go further and say, what if and what if, all right? I don't want anybody to think that us, considering Bryant Park's lease and in this scenario of refiguring -- taking the write-off of goodwill, has anything to do with characterizing our chances of renewing the lease.

This is strictly a mathematical computation. It doesn't take into account at all any feelings about where we stand in the process of renewing that lease. It just says basically the lease comes due in May of 2025 and what happens if we don't get it and this would be the result. And it's all triggered by the stock price falling below a certain point where this whole process began. All right? It has nothing to do with our feelings about whether or not we're going to renew that.

Okay. So should you get the lease back and the stock should probably bounce, are you then going to have to reconsider the goodwill situation again because now you're going to have a lease through another 20 or 30 years and the stock price (multiple speakers)?

No, the accounting standards, once you write off the goodwill, it's gone. You don't put it back on the books. The stock could go to 50. You don't put it back on the books. That's the accounting standards. I mean, that's not --

Okay. Well, last point and hindsight's 2020, now there have been people on this call that I've mentioned yield perhaps having some sort of buyback in place, stabilizing a mechanism in a very, very illiquid stock, which has been. And we're paying interest on a $7 million loan that for the moment, we don't need. And again, hindsight is 2020, but it might have been prudent to have a small buyback in place. And you might add -- this exercise wouldn't have been necessary because it wouldn't have taken much to keep the stock at $17, $18, and $19.

So that's a good point. The best way for me to answer this is this is certain there are certain moving parts in the way this occurred or even with the stock at $15, $16. We continue to have an eye on making some acquisitions. So we like the fact that we have this $14 million, $15 million to make acquisitions. And we're constantly looking at it.

And I rather have -- I rather be buying what I consider reliable cash flow than buy back my stock and have to borrow money to make acquisitions. So that's part of this.

The second part, honestly, is the stock is very, very thin. It's very hard to buy it. I assume that, at some point, the stock price will rationalize itself if we perform well. I'm not interested in being a support for the stock unless I had a hoard of money that I didn't see having anything -- any targets out there to use the money for.

So if we were in that position, yes, would I buy back the stock? Yeah, but how much am I going to be able to buy back? It's not going to be meaningful. What's more meaningful is having the money available to make, quote a meaningful acquisition that gives us long-term cash flow.

So that's been my position. Would we do a transaction to try to take the company private? Well, that presents problems also because certainly, certain shareholders would get screwed by that; others would do well. But the big problem would be how do you evaluate the value of our deal at the Meadowlands. And if that were to become a casino, everybody that was bought out would feel that we knew something and took advantage of some information that wasn't available to them, which is not the case, but we still view that way.

So I'm comfortable at the moment in terms of the company's cash balances to leave those in place and try to find something that enhances the company's cash flow long term.

Okay. Well, thank you, Anthony. Thank you, Michael. I must say I know that. Good luck.

Thanks, Jeff.

Peter Jackson, private investor.

Yes, good morning. Couple of questions. First of all, do you have any sense of timing on when the Bryant Park decision would be made?

We are told sometime in spring of this year, this coming year.

Okay. And how does it work in terms of the way they view if another restaurant group that's larger and well-financed, better financed arguably comes along, does this tie go to the runner? The fact that you've been in there and performed well, do we have sort of the lead position there? Or is it completely starting from scratch and they'll look at anybody equally?

I have no idea what they're trying to do in terms of their goals or -- I think this is a requirement of the Parks Department at the end of the lease. And we submitted our proposal. We know other people submitted their proposal, so as I said, we are finalists. We do not know what their goals are or -- other than to put out an RFP.

In terms of acquisitions, obviously (multiple speakers) --

And by the way, we've disciplined ourselves here not to drive ourselves crazy by speculating.

Okay. You mentioned you want to -- you're always taking a hard look at acquisitions. And certainly the prices you've paid in the past have been fantastic. But given -- I guess I want to just understand about the price increases. So totally understand that you don't want to raise prices or you want to keep them down as low as possible.

On the other hand, you have increased payroll costs, insurance utilities, which presumably all your competitors face as well in varying degrees. At what point -- I mean, the problem is that that's not doing a lot for margins when you're not raising prices and you have these increased costs. So what gives there and why are we in a different position from many other restaurants are?

So good question, and thank you. So I will mention something that's in our response to the RFP in Bryant Park. Post pandemic, we raised our prices 7%. So you're talking to a couple of years here. That's the average price increase. Our revenues this year -- or excuse me, our revenues post pandemic are up 12%, which means we're adding headcounts.

I would tell you the same thing is true in Vegas. Now, Vegas, it's not necessarily upsetting the headcount. Vegas is exploding, but we're adding headcounts in Vegas. We're very, very sensitive to headcounts as opposed to revenues. And we have long-term leases where -- Rustic is a great example. We were forced to raise prices in Rustic by more than 7% because the price of crabs went from $23 a pound to $54 a pound.

At one point, we were charging -- and we put 2 pounds on a plate. So we're at $135 right now for something at one point which was costing us $108 to put on the plate. But I have a blue collar -- a large segment of my customer base at Rustic is blue collar. And they use that restaurant for celebrations and anniversaries, birthday parties, blah, blah, blah.

Some people don't care. They're very wealthy and they want great meal with crabs and they come to Rustic. But in all of our restaurants, we have a pretty broad spectrum of people on where they stand on the economic ladder. I don't want to get a reputation that we are too expensive.

And that's the way we ran this company from day one. We've always had sort of an umbrella or safety as opposed to the quality of our product and services and our architecture and decor as compared to other restaurants in cities in which we were competing.

So it may be stubbornness, but I think in the long run -- in the past, it served us very, very well. Right now, what we're seeing is stability in food prices, stability in alcohol prices. And in some cases, certain prices are coming down, crab legs coming down. All of a sudden, we don't have a 70% cost in king crab legs.

We have probably a 50% cost of what's on the plate. This will swing back in our favor. I mean, payrolls aren't going to come down, but they're going to stabilize. Insurance premiums are the worst they've ever been and they're going to come down. So it requires a little bit of patience to get your margins back. But in the meantime, you're not changing the reputation of the company as being good quality food at fair prices. And that's what we're trying to do.

The reciprocal of that is we don't discount. You're never going to see us with coupon books out there or with deals. Because our statement to the world is, listen, you're getting good quality, good service, and a nice atmosphere. And the prices are fair. We don't need to discount to get more people into the place. And that's the reciprocal of it. So I think we are being consistent, and that's the way we want to run a business.

Okay, that makes sense. Going back to Bryant Park, did you -- I don't think you disclosed -- or maybe it was in the 10-K. But have you disclosed what the revenue is there and what would be lost if for some reason we didn't get it?

So we don't disclose revenues for any individual restaurant nor profits, all right? In this case, the landlord knows what the revenues are because we have a percentage lease there. But we've never allowed individual restaurants to promulgate through us what their revenues are. We think that's a disadvantage to landlord negotiations.

Okay, and then going back to Meadowlands, I certainly as a long-term investor appreciate your point about not wanting to take the company private because you potentially deprive shareholders of the upside from the Meadowlands.

But with that said, obviously that's something that may not happen or may not happen for a long time. And obviously, it's hard to make a plan when it involves governments and legislation. And it's hard to really handicap when that's going to happen, if it happens.

Would it ever make sense -- you said in prior calls that maybe Hard Rock -- Hard Rock would be the natural people to buy us out of our interest there. Presumably, they see the value there. They're not going to pay as much today as they would if it were a sure thing, right? And if it was a sure thing, it wouldn't make sense to do anything now.

But is there a way to bake into some kind of price with Hard Rock where they give us some value that reflects the potential while also on their side, reflecting the fact that may not happen? I'm not really saying that in the proper way, but you know what I'm getting at.

Yeah, so first of all, Hard Rock is the 20% owner of the limited partnership -- that's the partnership in the Meadowlands. But since -- when we made those statements like three, four quarters ago and before that, that they would be a natural buyer, Hard Rock is now part of bidding process with Steve Cohen to put a casino in Queens via Shea Stadium. So if that were to go through, we're not so sure Hard Rock will continue with us as an operator. They certainly would continue as an investor unless we bought them out or some other operator bought them out.

So that conversation with Hard Rock, it doesn't make sense at this point. And it would make sense perhaps if they are the operator and there seem to be some movement favorably toward getting a casino license in the north. So that's not a conversation you can have right now.

By the way, it's a conversation that I don't think I want to have because we still are of the opinion that the likelihood of us getting a casino license there is a pretty strong. It's just a matter of when does New Jersey's legislature react to downstate casino licenses in New York, which have not been issued yet. And we don't think they're going to be issued for another year to 18 months.

And in terms of trying to -- your question sort of begs an answer to taking this thing private. I'd go back to my statement. I rather buy recurring cash flow for our shareholders and then to get our shareholders out of the way and try to take advantage of a price. But I have a Board of Directors. And that, in large part, becomes their decision and it's a discussion that does come up.

So I'm just -- as one member of the Board, I'm giving you my opinion. I have had a look at this thing. And, look, I've been at this for a long time. Other than from my foundation, I've never sold a share of stock. I've never bought a share of stock.

I may be sort of dumb in terms of saying to myself, the stock price will be rationalized at some point, as investors see value. Obviously this quarter, investors are looking at the headline, which is this write-off at $10 million, which is the non-cash write-off -- does not affect the operations of the company at all. If you add back Gallagher's in Las Vegas, you still have an $11 million plus EBITDA with Southern Florida performing terribly. That will change.

The product that we have there, the sites are just too good. And we perform well down there. So that will change also. Vegas will get better. And it's already great, but it's going to get better still, And our New York restaurants are very strong. Our Alabama restaurants perform well. We will find things to enhance cash flow here through acquisition. So somewhere along the line, that will be recognized. Our balance sheet is good for a company our size. Yeah. So that's the way we look at this.

Thank you. That's very helpful.

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

All right, thank you. There are some good questions. I appreciate the time you're spending with us, and we look forward to our next call with you. Have a happy holiday season, everybody.

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