Q4 2022 Ark Restaurants Corp Earnings Call
Speaker 2: Well.
Speaker 3: I don't get it. I'm going to get on my toes. Greetings and welcome to Arc Restaurant's fourth quarter and year-end 2022 results conference call.
Speaker 4: At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star-0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dr. David
Speaker 5: Christopher Lo, Secretary for Arc Restaurants. Thank you. You may begin.
Speaker 6: Thank you, operator. Good morning and thank you for joining us on our conference call for the fourth quarter and year ended October 1st, 2022. My name is Christopher Love and I am the secretary of our restaurant.
Speaker 7: 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 it's available on our website.
Speaker 8: To review the full text of that press release along with the associated financial tables, please go to our homepage at www.aucrrestaurants.com.
Speaker 9: 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.
Speaker 10: We refer everyone to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have direct bearing on our operating results, performance, and financial conditions. I'll now turn the call over to Michael.
Speaker 11: and Exchange Commission for a more detailed discussion of the risks that may have direct bearing on our operating results, performance, and financial conditions. I'll now turn the call over to Michael. Thank you.
Speaker 12: Hi everybody. Thank you for joining us today.
Speaker 13: The comparisons of the September quarter this year with the September quarter of last year are affected by two segments of our expense side. One is a substantial increase in payrolls.
Speaker 14: and the other is a substantial increase in occupancy costs. In order to try to get...
Speaker 15: the
Speaker 16: the flow of the business.
Speaker 17: correctly stated of where we are, I want to first have Anthony explain occupancy costs.
Speaker 18: 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 EBDOT in the fourth quarter, and there are adjustments this year which sort of deflate EBDOT in the fourth quarter.
Speaker 19: our EB dot 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.
Speaker 20: where we were negotiating, still negotiating COVID rent abatements in 2021. So we were still accruing the normal base rents the whole time because counting, according to the accounting standards, we couldn't record any abatements until we had signed deals. Those deals were signed.
Speaker 21: last year in the fourth quarter.
Speaker 22: And, you know, they were recorded which reduced occupancy last year by about $800 to a million dollars. 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.
Speaker 23: 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 two items. And that's why occupancy looks so odd.
Speaker 24: So basically last year we reversed an accrual of rents for the full year of our fiscal year 2021 in September , which created a million dollar
Speaker 25: increase in EPDOT essentially based upon our 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.
Speaker 26: until the leases were signed and essentially those rents for the full year because we had to go back.
Speaker 27: to January 1st of 2022, were about a million dollars that fell into the fourth quarter. So there's a $2 million swing here. I like to address payroll costs. That's the other big item.
Speaker 28: payroll went up roughly $2.8 million compared to last year's September quarter.
Speaker 29: What's interesting is the payrolls now is a percentage of sales.
Speaker 30: mirror.
Speaker 31: 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.
Speaker 32: I may have made a mistake.
But as 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 three, four, five weeks. It was a mess. And as the market opened up a little bit, especially in Vegas, and I wanna talk about that a little bit more, the directive was 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 drops that have been vacant.
or jobs where we didn't have the right people, went out and hired them and we're paying a lot. 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 costs.
So that sort of will.
get you to where the difference is the main differences were and and how they occurred. In terms of our business, the September quarter we were not raising prices aggressively at all.
In many of the restaurants we just stopped. We don't know, it's an art form to try to figure out what the elasticity of pricing could be in some of these restaurants. But we're in.
at prices that are sort of
especially when you've been in 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 gonna look at them and feel comfortable paying them. This is especially acute.
in Rustic in Florida. We're now serving a two pound order of King crabs. I always go back to this as an example. It costs us 85% of the sales price to put that dish out.
We're charging $135 for it. It used to be a $75 dish. I would tell you one out of four 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 is an 85.
percent food cost and and the fact of the matter is even though
We're almost giving it away. Our customers can't afford it. They're now sharing it. People are not coming as frequently for it.
We have a blue-collar crowd there and and it's just
you know, it becomes a celebratory.
Our business in the September quarter was down some 20 plus percent in Rustic and that sort of Had a big impact on our EBDI as well. That's an extraordinarily profitable restaurant The rest of Florida we're doing fine Our food courts in the two 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.
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, DC So the business is fine. We did four million dollars as I said an increase sales
the two big items which need to be understood as to why the comparison looks
significantly different between last September and this September's quarter are rents
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 we've, in many cases, we had two people doing the job but one 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 for questions now.
Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. We do understand the hold. The question answered through 6
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Our first question comes from the line of Paul Johnson, a private investor. Please proceed with your question.
Good morning and thank you for the explanation around those numbers.
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 get for 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 are equal?
incurred over the last fiscal year are what we should be modeling going forward.
It's a tough question. I can't... I snuck inMoney
I think...
There is one.
thing that we all have to be aware of. Our business in Vegas has been extremely long.
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, two new hotels came on board. They required 8,000 people in a labor market that was impossible to start out with.
what covered up
I
our struggles and and helped us dramatically was this boom in an 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, will figures they might need to pick their brands.
most of our sales in Vegas come from, is more active than ever between hockey games and 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, you know, between price increases and added customer accounts, our Vegas business was up 15% from the year before. As long as that's sustainable, I think, you know, the level of earnings that we had for the year, this year.
are probably sustainable. I honestly expect New York to continue to perform well.
The 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 you know, there's a big hole in missing in rustic CBD. That restaurant used to do 3.4 million dollars in you know, operating cash flow. It's down to 1.6 annualized.
So, you know, the 14 million dollar number that of EBITDA that we did this year, that's a big hole. You know, a million eight of that, a million eight is missing from Sequoia. Not Sequoia, excuse me, Rustic Inn. So I think that should do.
hopefully better at some point, maybe not immediately.
the
The Vegas numbers had a one-time $500,000 retirement payment for Paul Gordon, who retired as general manager.
you know, that's a one time, a true one time expense item. Anthony could speak with, we're paying down the term loan with our bank, or 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'll save us $400,000 in interest charges. Right now, Anthony, if I'm correct, we have about $28 million, $29 million in cash in the bank. What's the debt?
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.
No, that's really helpful. Thank you. Can you just give an update on the metal lens?
Yeah, I'll be happy to. It's a repeat of the last update.
We definitely think the Meadowlands will be the site for a casino in northern New Jersey for a variety of reasons. Number one, the racetrack already has, you know, betting going on and that's an advantage.
The sports betting at the Meadowlands is, I think, has been the largest single US site for sports betting, although there's been an encroachment with online betting 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 the casino where we would literally be 90 days away if it was approved from having a casino operation, literally. The race check was designed with that in mind.
the whole theory about getting this passed by the citizens of New Jersey, because 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 Manhattan. There are two groups vying for
one of the three licenses in Manhattan.
If those licenses are issued or if they start building and operating, certainly Yonkers and Aqueduct could operate right away.
If those licenses are issued, or if they start building and operating, certainly Yonkers and Aqueduct could operate right away.
New Jersey recognizes that, you know, 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 that's the plan. Murphy is very, governing in Jersey, is very favorable.
what that referendum would look like last time the referendum required that the casino be operated by some some company that is already licensed.
in New Jersey, which would be one of the Atlantic City operators. At that time when the first referendum which you know 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're our partners in this ledger. So I think...
Yeah, 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.
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.
Thank you and just finally on that I know you've mentioned 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'd have to pay is almost equal to the whole market cap of ARK. Is that is that within the realm of positivity.
when
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, it was just fluff. And, but we did have a conversation with MGM.
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, you know.
We, we, we own seven...
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%, we're going to have to have to have a lot of dilution. So we're going to have to have a lot of dilution.
That's $20 million of cash flow that you could attribute to...
to, you know, AHRQ's interest. We also have an exclusive on all the food and beverage, with the exception of a Car Val for a Hard Rock Cafe.
That's probably a 50, 60 million dollar business for us.
So, you know, the potential economics are extraordinary.
But first get me the casino license. I mean, you know, we don't have that.
I don't know what that's worth, but certainly I don't think it's priced into the stock.
I appreciate that. Thank you.
As a reminder, it is star one to ask a question. Our next question comes from the line of Jason Walters, a private investor. Please proceed with your question.
Thanks. Good morning, guys.
Quick question on acquisitions.
and capital allocation. I know Michael you like to purchase.
Companies for, you know, 3 to 5 times. Depending on whether you're getting the land included.
and
You know, ARK is 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. Thank you.
Well, thank you, and I'm glad you got it right. Three to five times, 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
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.
Another influence, which we don't even think about, but you should think about, is the already illiquidity built into our capitalization. We just don't have that many shares outstanding, floating around. We just don't have that many shares outstanding, floating around.
I mean, I could tell you where 60% or 65% of the float is right now, and it's not leaving those hands. I mean, I could tell you where 60% of the float is right now, and it's not leaving those
So we have...
You know, we just don't have enough shares outstanding. That's a bad thing because, you know, somebody that wants to buy it, you know, 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. A block comes up, there's not necessarily a buyer available.
So we just don't want to shrink the shares anymore.
That all being said, we're still much better off.
buying stuff to three to five times.
With these 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.
make no mistake that this you know I think we made smart acquisitions but the luck involved has been that every chef and every manager of every restaurant that we've required 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. www. insert
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 in 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.
answers your question. Yes, thank you.
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.
the
Hopefully, you know, things continue to improve for us.
and we'll speak to you the next quarter. And I appreciate your participation and the questions very good today.
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.