Q3 2022 Ark Restaurants Corp Earnings Call

you

to your host, our secretary, Christopher Love. You may begin.

Thank you, operator. Good morning for joining us on our conference call for the third quarter ended July 2nd, 2022. My name is Christopher Love and I am the secretary of Arc restaurants. With me on the call today is Michael Weinstein, our chairman and CEO , Anthony Sirica, our president and chief financial officer, and Vinnie 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 news wires yesterday and is available on our website.

To review the full text of that release along with the associated financial tables, please go to our homepage at www.arcrestaurant.com. Before we begin, 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. We will now move on to our filings with the Securities and Exchange Commission for more details.

the balance sheet real quick as you saw on the release our cash was twenty six point six million It's as of today. It's probably up a million from that other significant changes on the balance sheet we did collect our Carry back claims during the quarter of two million dollars. So that took that process took about a year but we finally got the refunds from the CARES Act which enabled us to carry back losses five years instead of three

We have a significant increase in our operating right of use assets from the Las Vegas lease extensions of about $24 million with a corresponding increase in the liability.

And our debt is $25 million, which is made up of $23.5 million to the bank.

700,000 seller note from the Blue Moon purchase and 800,000 of PPP loans, which there were two loans remaining outstanding, which we are still working on getting them forgiven. We had a couple of questions from the SBA.

As far as the quarter goes a couple of items of note that in the current quarter

There are one-time adjustments for compensation approvals of about half a million dollars, as well as there are accruals for the Vegas lease extensions of approximately $300,000.

So essentially, the accrual for compensation was a one-time accrual for future payment of compensation. The accrual for the Vegas leases occurred because when we started negotiations with MGM for the extension of our leases...

The extensions were going to be as of January 1st, 2022. The leases were not signed until the middle of this year. We were not able to accrue because we didn't have signed leases earlier. Our accountant said that would be inappropriate. So once the leases were signed, we had to.

go back and accrue for those extra rents, which were paid recently. Yeah, just, I'm sorry. Yeah, go ahead. Just on that note, if you recall from the last conference call, one of the leases was signed. Now all three of the extensions have been signed. The third one was signed subsequent to the quarter on July 7th or 8th, and that's the one that caused this accrual because we had to accrue back to January 1. Right. So basically this.

800 and some odd thousand dollars of accruals that were really either one time in the case of the compensation accrual and in terms of the Vegas leases didn't really belong in this period.

So, you know, the quarter was stronger than the EBITDA.

at yours, the $6.2 million in EBITDA, if he just broke out the quarter by himself.

million and he'd be if he just broke out the quarter by his self.

Anthony, anything else that you want to? I think that's a significant item. I think so too. Yeah. So. Wonderful.

We come into the...

fourth quarter of our fiscal year with a strong balance sheet.

to review and go forward with what we think is going on.

The quarter was specifically strong with events in Bryant Park, Sequoia.

It was very strong with revenues in Las Vegas.

Alabama

Florida starts to dip sort of in May, so we saw some bad comps.

in relation to the winter period in the Florida full service properties. The fast food and hard rocks in Tampa and Hollywood held up very well. What we saw is...

the the equation if you want of menu price increases

still were not able to keep up with the 2021.

period with revenues. That means essentially that even though we increase menu prices our head counts were dropping.

The worst of that was probably in late June and July of the current quarter. What we're seeing now in August is that gap is closing and we are much closer and in some cases revenues are ahead of the similar periods last year.

So.

We don't think we're seeing the impact of quota recession or the results of the headcounts disruption because of gas prices, especially in Florida, because gas prices would have an impact if you buy into the fact that, you know, our customers are heavily impacted. One of the anomalies here for us is Blue Moon Fish Company, which is our...

highest priced restaurant where you have a very well-heeled customer, those head counts were down substantially in late June and July . They've sort of come back and were sort of revenue even with the comparable period last year. JB's on the other hand, which has a lower check average, has been running ahead of last year.

Now, this is not in head counts, this is in revenue. We're still probably behind a little bit in head counts in JBs and a little bit in Blue Moon. Rustic, which has a very high check average because it's weighted toward, you know, king crab lakes and some high priced items. We were down 20% in revenue. Net numbers now.

about 9-10% down. So we're actually seeing...

our customers come back Despite all this recession fear and and so we're very pleased Alabama is way ahead of last year both in the customer counts and and in revenue we had modest price increases in Alabama

By the way, in terms of price increases, the mantra here is let's keep our customers, let's not worry about profit margins. So we're raising prices where we have really no choice, King Crab Lakes again. But for the most part, we're not looking at trying to retain profit margins, we're trying to, you know, or gross margins, we're trying to retain customers. They have a balance, right? And we're looking at all these restaurants separately.

percent. We just don't feel comfortable.

getting, you know, trying to retain the same margins that we retained. So we've been very cautious about raising prices.

very aggressive about retaining customers. It seems to be working. Our customers are there. If there was slippage in late June ...

mid-July, that slippage has seemed to improve dramatically.

So if I take a look at these things, you know, zip code by zip code, Vegas, very strong revenues.

Alabama, very strong revenues.

Florida seasonal adjustment may be down a little bit from 2021 in revenues and in head counts but I would say to you in the full service restaurants in Florida, we had a bumper year in 2021. The whole pent up demand idea was certainly, you know, winded our back last year. It was even more evident in Florida. Yeah, more so in Florida.

Sequoia in Washington had a great event.

quarter, in the June quarter, August and September start to slow down, it will continue to slow down until mid-September, but we have a very strong event calendar for this quarter in Washington for October , November , December . Bryant Park, huge event success in the June quarter, again slows down right now in August and September .

But we're fully booked with events in the December quarter. The one restaurant that we're probably having problems with, although events are starting to come in, is Robert at the Museum of Art and Design. The Museum of Art and Design is having its own problems. They have a new director. Attendance has not been good.

publishing office buildings, publishing industry has a lot of office buildings right around there, those buildings are still...

way off in terms of occupancy. The publishing industry was a big customer at lunch. Robert is the only

disappointment in terms of strength of revenues compared to prior quarters, but again the event calendar starts to fill up in in September . So we're very happy with these businesses right now.

Bye.

you know

The

The efficiency is not there because we're not efficient with menu prices this cost. And that's going to continue for a little while. Labor costs, we are paying a ton of overtime because we can't fill our schedules with new workers. That seems to be changing a little bit in New York. I'm here.

You know, I see people walking into our restaurants looking for jobs, which was not the case two, three months ago. Vegas is still having a lot of problems finding employees. Alabama, a little bit. We're paying overtime, a lot in Alabama. Florida seems to be getting people now. Washington, D.C., we seem to be all right. For instance, the one restaurant where we can't get enough people to...

Man every shift is Robert, we close now Mondays, have been, we're going to try to get Mondays open you know sometime after Labor Day. So the business is strong, the balance sheet is strong, we don't see any deterioration that we should be concerned about in head counts. I'll mention Meadowlands for a second. Last year our K-1 in Meadowlands, our share.

was about $560,000. We don't report that. It's K1 income. What we do report is the distributions, which was some $200,000. We continue to be profitable at the Meadowlands, or I shouldn't say we. The Meadowlands continues to be profitable. Plus spending was impacted somewhat by...

The the upstate sports betting in New York, but we still are having very strong results What is interesting to us is New York seems to be going forward

Rather quickly with giving licenses for downstate casinos, we think that is the catalyst for New Jersey to approve a northern casino away from Atlantic City. We think the likely location is the Meadowlands Racetrack. So we've become consistently more optimistic about that possibility of having a casino license at the Meadowlands.

With that, I hope I've been clear, but please ask questions.

And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue.

for participants using speaker equipment and may be necessary to pick up your handset before pressing the start keys.

And our first question comes from the line of Sandy Mehta with Evaluate Research. Please proceed with your question.

Yes, good morning Michael and Anthony. Congratulations on a very strong set of results across the board.

Thank you.

Do you feel like you are benefiting from market share gains or that in some of your locations, competitors have been weakened by the pandemic for the last couple years? And relatedly, are you seeing, what are you seeing in terms of acquisition opportunities? I know you guys are preferred buyers of properties based on how you operate. Are you seeing interest there or pricing that's reasonable for potential deals? Thank you.

All right, on the first question, Sandy, I hope you will, by the way.

The, the, we don't pay attention to competition. We're not that empirical. There are 25,000 restaurants in New York or used to be. I don't know where we stand vis-a-vis all of them. So I'm not, you know, and I would say.

I have the same attitude in every venue where we're present. I have no clue whether we're picking up an architecture or not. The second question I can answer.

We were looking at a deal that we broke off negotiations when we felt that the May numbers and June numbers of that property weakened substantially and...

we were concerned, so we broke off negotiations.

We had another deal we're actively working on. We think the pricing would be fair. –

With most deals that we look at is we have to have landlords adjust the leases.

The tenants who own the restaurant, if they are leasing a restaurant, generally don't have leases which are totally acceptable to us.

If they own the property, then there's not rustic or shuckers or the two in Alabama where we're buying the land as well as the operation. It's not a problem. We haven't seen one of those in a year or so. That would be interesting to us. But we're now looking at a property with a long-term lease and they're meeting today with the landlord, as a matter of fact, to see if they can get the adjustments in the lease that we need to go forward.

So, we are seeing stuff with PICCI, you know, we're very conservative, leases have to meet our criteria, but we are seeing, you know, occasionally...

good acquisition possibilities at fair prices.

So that's the answer I would give you.

Great. Thank you so much.

Our next question comes from the line of Paul Johnson, a private investor. Please proceed to your question.

Yes, good morning and congratulations. I it's a long-term investors is pretty amazing to see how far you've come since the dark days of COVID.

Cool.

So just in terms of the first of all I just want to ask you've had a recent appointment to the board of Jessica Cates and you've had some insider fairly substantial insider buying from a Thomas Ciderfield I'm wondering if you can comment on on either of those

Jessica, art statement retired from the board. Jessica came to us, these are our outside auditors and they recommended her.

I did and had conversations with people she had worked with and they were stunningly good recommendations. I did and had conversations with people she had worked with and they were stunningly good recommendations.

She brings investment banking.

talent in the food industry. She's also run Private Equity. Her partner sits on the board of Cheesecake.

She's extremely bright, very personable.

And we've only had one board meeting with her, so you know she she was

Not very talkative for the first time. She was a good listener, but I think she brings a lot of value to the company.

In terms of Thomas Satterfield,

All I can say is he's been a gentleman throughout.

He has never pushed us in terms of giving him any information which is not public information. He is an ideal partner. He owns some 500 and some odd thousand shares right now. I'm delighted to have somebody take an interest in the company the way he has.

And we don't have that many conversations with him, you know, but we're just delighted that he's here.

We don't have that many conversations with him, but we're just delighted that he's a shareholder.

For sure, and those are great additions. I just was curious if there was any kind of...

Additions I just was curious if there was any kind of strategic

change as a result of either of these people, you know, becoming more involved, let's say.

Look, the strategy of this company is, you know, we got either lucky or we were, you know, in the business at the right time in the right areas. I mean, if I look at the history of the company started on the Upper West Side in the 70s, which was dramatically under restauranted with great gentrification taking place around our restaurants. Until now, I need the talent to manage served restaurants and the business players and we give them a chance to do that.

I think we were good restauranteurs, but I don't think you had to be very good to be successful. I mean the

The supply-demand situation was favorable. We moved out of the city and found we could run restaurants outside of the city. First one in Boston. We got lucky with Bryant Park, which nobody else wanted. We got lucky with Vegas, which...

You know, even my board disagreed with Initially with why are we going Vegas? We honed our skills, you know being able to run big operations.

away from New York, you know, Vegas, there have been days where we served 25,000 people. Brian Park we served on really good days, three to four thousand people.

New York, you know, Vegas, there have been days where we serve 25,000 people. Brian Park we serve on really good days, 3,000 to 4,000 people. The choir, you know.

1100 seats rustic in you know constantly serving a thousand people a day plus. So we've developed this skill of...

building, designing, and operating large-scale restaurants which we leased.

designing and operating large-scale restaurants which we leased.

Six years ago, somebody came to us with a deal, a broker, to the Rustic Inn, again a 600-seat restaurant where we could buy the land and be our own landlord.

And, you know, a light bulb went off in our head. It took a long, long time, but a light bulb went off and said, why are we leasing stuff? And why are we building stuff when we can buy cashflow at three to four times?

You know EBITDA Risk reward ratio of building You know is not as good as being up to buy these things So our plan going forward is essentially to buy cash flow. I don't think you can show me anything In terms of leasing and designing and building a new restaurant That would be as attractive as waiting patiently To see you know

These softballs that we're getting, you know, a lot of cash flow for very reasonable prices and that to me is a better business. So that's the way we're proceeding.

No, for sure, and obviously having the vinyl land underneath provides an underpinning and safety element.

the long term versus being subject to inflationary increases from a landlord. Those lines

Do you feel like you have the geographic diversification? Obviously, you've got sort of from, you know, the winter months, you've got Florida, the rest of the year you've got, you know, New York and Washington and Vegas.

Is there an argument for, I don't know, Texas or the Southwest or the Midwest for that matter, providing a little bit more geographic diversification or would you rather stay narrower and deeper in, let's say, Florida and Alabama?

argument for I don't know Texas or or the southwest or or the Midwest for that matter it providing a little bit more geographic diversification or would you rather stay narrower and deeper and let's say Florida and Alabama

So the answer to that question is

First of all, when you talk about the winter months in Florida, they're better, but I don't want for one second for anybody to think that these restaurants don't make money in Florida in the middle of August . They do.

So the cash flow positive.

or you're out.

If we are in southern Florida, day Broward County, if

We wanted to buy a restaurant in Sarasota. That restaurant is...

hard or easy for me to run as a restaurant in Austin, Texas.

It just takes a little longer to get to Austin. So diversity is not our goal. Our goal is to find a product that we could buy at a fair price that has a history of good management, that we not only keep that management, which is extremely important to us, but we have visibility.

with that restaurant, either through a long-term lease or through ownership. One of the things we've been very fortunate about is that if you look at Rustic, Shuckers, JB's, Blue Moon, the two restaurants in Alabama, all of those acquisitions, the management has stayed with us, the chefs have stayed with us.

The great majority of the staff has stayed with us. I would like to think we're a better employer than the people that sold us those properties or at least as good because a couple of them were really good as employers, but a couple of them were really bad and I think people like working for us. So the key is I don't want to buy something that's good and you know and find that all the key people are are

saying goodbye because that's where the knowledge and talent is. So, you know, that's a major criteria for us, but I don't care where the property is.

But there's no argument for I mean obviously Florida is hot right now and there's you know all kinds of articles about people moving down there and so maybe it's part of a longer term. There's no there's no argument to that.

Well, no, I was just going to say obviously there may be a longer term secular shift and being even deeper in Florida as an argument. I'm just asking whether other markets would provide... Go ahead.

I was just going to say obviously there may be a longer term secular shift and being even deeper in Florida as an argument I'm just asking whether other markets would provide go ahead I'm not smart enough to know that

Right, I'm just asking whether having restaurants in the Midwest would... You're asking a question that's not important to me. What is important to me is that I buy good cash flow for a reasonable price with good management and I really don't care where that property is.

Fair enough.

Thank you.

You're welcome.

Our next question comes from the line of Jason Walters, a private investor. Please proceed with your question.

Sure, thanks everybody. Just a quick question Michael and I think you've...

I think it's probably implied from what you were just saying, but obviously the company's building a large

pile of cash here you're knocking on the door of 30 million dollars

I assume the primary plan with that money is to look for these acquisitions that you've described the criteria for going forward.

Or do you have any other thoughts for the use of that cash?

So one of the thoughts is maybe pay down some debt because we don't get very much of that money by investing in, you know, treasuries or CDs. So we could conceivably pay down some debt. I don't think we're at the point yet where we want to increase the dividend. We would only pay down the debt if the banks were willing to pay down the debt.

is maybe pay down some debt because you know we don't get very much for that money by investing in you know Treasury's or CDs so we conceivably pay down some debt I don't think we're at the point yet where we want to increase the dividend we would only pay down the debt if the banks were willing to

to extend us a new revolver for which we would pay some small fee. But yeah, it's a good question. The acquisitions we have been making in the past did not require, I mean, I think the most expensive one was $10 million in Alabama. After earning a diploma for the US'.

A new revolver for which we would pay some small fee. But yeah, it's a good question. The acquisitions we have been making in the past did not require, I mean, I think the most expensive one was $10 million in Alabama. Right now, we're going to be making about — oh, okay.

So, they don't require us to have, you know, I mean with float right now we have some 30 million dollars in the bank.

You know, we haven't been active enough to say that we're going to use that $30 million within a 12-month period, for instance, or a good part of it. We do have obligations.

in conjunction with the Vegas leases. Right now, this year we're going to spend a million and a half dollars to redo the kitchens of Gallagher's. We have obligations to sort of dust off the...

the food court, the village streets.

we have a longer term obligation two to three years out.

of spending maybe four or five million dollars for to spruce up America.

conceivably maybe changed the concept. We have

Some opportunities to increase

and change the units in the village streets of New York, New York. So I would say to you there's seven, eight, nine million dollars over the next couple of years that we're gonna be spending just in Vegas now. The argument could be made, well, Vegas alone throws off that kind of cash flow and therefore 30 million dollars is gonna be untouched. And that's the right argument by the way. But we know we're sitting on too much cash.

and if we, you know...

And if we, you know, we should probably be paying down debt.

I hope that answers the question.

Yes, thank you.

And our next question comes from the line of Jeffrey Kaminski with JJK Consulting. Please proceed with your question.

Good morning, Michael and team again. Congratulations on another strong showing Mikey you touch base briefly on mentioning the dividend and in conjunction with the excess cash that you have what is the reluctance to bring the level of dividend back to where it was pre pre pandemic and then I have a second question after that.

All right, so the first answer is our board wants us to move slowly.

should have mentioned also when I'm talking about the seven eight million dollars we're going to spend in Vegas. The closer we get to

mentioned also when I'm talking about the seven, eight million dollars we're going to spend in Vegas. The closer we get to, to, and the reason we want a new revolver.

So, the more optimistic we get about the metalands.

We have

exclusive on all food service and food and beverage service in the metal lands if it becomes a casino. That's going to be an expensive proposition even though...

our agreement

which is in place, requires a substantial tenant improvement from the landlord. We could still spend many millions of dollars, you know, building seven, eight restaurants and bars, and you know, so, and then there's the question of dilution. You know, we're looking at a project that's a billion dollars in construction.

We own slightly less than 8% fully diluted right now, obviously depending upon the equity to debt.

ratio for the metal lands when they go into construction. The question will become, where's our stock? Do we want to sell equity? How much cash do we have on hand? How much do we want to be diluted or are we going to raise money not to be diluted at all? So we have a use for that. That money will go very quickly if the metal lands becomes a casino.

So, that sort of plays into this whole thing. The other argument has been, for me, I don't even think we get there. I think if there's a casino license and Hard Rock is the operator, I don't know that they really want us to be involved and may want to buy out our interest. So, there's a lot of questions regarding our balance sheet with relation to the future of the Meadowlands.

There's a reluctance on the board to move too quickly with increasing the dividend. I think it's important that we look at a new revolver and pay down some debt right now.

And you know, that's sort of the answer. I'm sorry it's a little vague, but you know, you're not going to see a dividend increase beyond what we've done for the next.

a couple of quarters. Yeah, I just think from a board perspective, although this quarter was very strong, and subsequent to the quarter, the numbers looked good. Obviously, we're cautiously optimistic, but you watch CNBC, I mean, there's a lot of negative sentiment out there about what's coming, so we want to take measured steps with the dividend.

I understand. So my second question, I'm glad you brought up the metal lens Michael, because that's where I was going. Yeah. And.

And Sam who's here, you know, just whispered in my ear what you should really, you know.

as opposed to paying more of a dividend if we have the opportunity to buy more cash flow, you know, the cash

should be going to that.

So understand understand so much my follow-up and is in the direction of the metal land which you had mentioned so twofold I agree. There's been a significant push in terms of Gambling in downstate, New York I know the ownership of the New York Mets has been pretty aggressive in Already filing papers and getting lobbyists trying to get something that the city field location Um given your involvement at the metal lands. Are you privy to any information that you could share?

No, it...

It's not even that it's going to become an emotional rollercoaster, I'm not that way. I mean, what happens will happen. I will be prepared for it.

Right, whichever way it goes. All right, and then the last point on the metal lens, Michael, you've said before, and you've been very consistent, that you see a likely, you know, should there be gambling there, that you see the likely outcome is that they don't necessarily want you around as a partner and, you know, you'll negotiate a favorable term, take the money and run, so to speak. Do you see that negotiation would include that you would have the equity interest bought out, but you would maintain...

running the restaurants at the facility or basically it would be a buyout and you would basically exit the whole property. Thank you.

So, my preference would be...

My preference, you know, this is all in my mind. I have not had any discussions with Jim Allen Who's the CEO of? You know the hard rock With regard to this. It's just guessing on my part from the way they behaved in the past with With the development in Hollywood where they bought out

the minority interests.

We're restauranteurs. We're in the restaurant business.

Obviously, our preference would be to continue running the restaurants. There is a carve-out on exclusivity for a hard rock café, so that's not an impediment to them. You can still have a hard rock café.

We would like the opportunity to be restaurateurs wherever we see dynamics of, you know, that would be favorable to us. I would think that would be very favorable. That's the only comment.

Okay, thank you guys again.

Thank you.

And it looks like we have reached the end of the question and answer session. And I'll now turn the call back over to Michael Weinstein for close remarks.

Yeah, thank you for the questions. I appreciate the interest.

We'll be back with our fiscal year-end speaking with you and we look forward to continue good results.

for our Autistical Year-End speaking with you, and we look forward to continue good results. Have a nice day.

And this concludes today's conference and you may disconnect your line at this time. Thank you for your participation.

Thank you. Thank you.