Ark Restaurants Corp. (NASDAQ:ARKR) Q4 2023 Earnings Call Transcript

Ark Restaurants Corp. (NASDAQ:ARKR) Q4 2023 Earnings Call Transcript December 19, 2023

Ark Restaurants Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to Ark Restaurants Fourth Quarter and Fiscal Year Ended Results. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [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.

Christopher Love: 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; and 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.

Michael Weinstein: 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.

Anthony Sirica: 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-some-odd million 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 highlight of the balance sheet. On the P&L, Michael is going to talk about.

Michael Weinstein: Yes. 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 improvement cost of 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 were about 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 of 15, 16, 17, something in that area of lost cash flow. So the $9.6 million 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 JBs, 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’re down 10%, 15% on a weekly basis and it continues. Our Hollywood property, which is a fast food facility within the Hard Rock Casino 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’re seeing a pretty — early on, 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 when we replace 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, Fontainebleau this year came after some of our people. In this particular 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’re 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 do not make a year, obviously, we’re seeing record sales in New York at Robert and Bryant Park, and we’re seeing record sales in Las Vegas. So a lot of our 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’ve raised prices modestly, and we’re facing continued increased payroll costs everywhere, increased 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 of 2025. The RFPs came out. They were a bit vague. We got some better color on what they were looking for in terms of RFP response. We responded on…

Anthony Sirica: Late October.

Michael Weinstein: No, November 1. October 26 is when we responded. 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 Park closes at 10. There is a requirement that noise levels because it’s residential around it, be kept to a minimum. So, there’s no such thing as parking or 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’ll 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 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.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Jeff Kaminski with JJK Consultants. Please proceed with your question.

Jeffrey Kaminski: Just 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, 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, the low trading volume stock maybe high high-17s, low-18s to high-14s or 15s, that’s from top to bottom maybe 20% movement in stock. I don’t know who can say is that volatile to triggering events. So I’d like some color on that. And secondly, you include as part of the triggering event, and again, you make a sound the event as if it’s a singular event, but you also include that the upcoming expiration of the Bryant Park Properties and lease and related proposals.

So what was the trigger? Is the trigger of the volatility on 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.

Anthony Sirica: 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%, 15.5%, which was still at 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 had to take into consideration multiple scenarios. You couldn’t just project out that you were going to keep Bryant Park for the next 10 years. You had 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.

Jeffrey Kaminski: Had the stock price held then you wouldn’t have had to consider the Bryant Park lease expiration. It was the triggering event was the stock price vis-à-vis the book value?

Anthony Sirica: Yes.

Michael Weinstein: So the answer to that, Jeffrey, is two-fold. Number one, if the stock price had held, we once we’ve gone through this process and then the outside consultants and our own J. H. Cohn, who are our auditors, once they’ve 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 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 begins. All right, it has nothing to do with our feelings about whether or not we’re going to renew that rate.

Jeffrey Kaminski: 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 at least to another 20 or 30 days from a stock the accounting standards.

Anthony Sirica: No. The accounting standards, once you write-off the goodwill, it’s gone. You don’t put it back on the books. The stock would go to 50%, you don’t put it back on the books. That’s the accounting standards. I mean, it’s not.

Jeffrey Kaminski: Last point in hindsight 2020, there have been people on this call that have mentioned perhaps having some sort of buyback in place, stabilizing mechanism in a very, very illiquid stock, which has been, and we’re paying interest on a $7 million loan for the moment we don’t need, and again, hindsight is 2020, but might have been prudent to have a small buyback in place, and you might have this exercise wouldn’t be necessary because it wouldn’t have taken much to keep the stock at $17, $18, and $19?

Michael Weinstein: So, that’s a good point. The best way for me to answer this is 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 balance to make acquisitions, and we’re constantly looking at it. And I’d rather be buying what I consider reliable cash flow then buy back my stock and have to borrow money to make acquisitions. So that’s part of this. The second part, honestly, 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 lot of money that I didn’t see having anything any targets out there to use the money for.