ARK RESTAURANTS CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to any historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "potential," "project," "projection," "plan," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended September 30, 2023 and the consolidated condensed financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. Inflation Our operating results have been and continue to be impacted by geopolitical and macroeconomic events, causing increased commodity prices, wage inflation and other increased costs. The ongoing impact of these events could lead to further shifts in consumer behavior, wage inflation, staffing challenges, product and services cost inflation, disruptions in the supply chain and delays in opening or acquiring new restaurants. If these factors significantly impact our cash flow in the future, we may again implement mitigation actions such as suspending dividends, increasing borrowings or modifying our operating strategies. Some of these measures may have an adverse impact on our business, including possible impairments of assets. Overview As of March 30, 2024, the Company owned and operated 17 restaurants and bars, 16 fast food concepts and catering operations, exclusively in the United States, that have similar economic characteristics, nature of products and service, class of customer and distribution methods. The Company believes it meets the criteria for aggregating its operating components into a single operating segment in accordance with applicable accounting guidance. Accounting Period Our fiscal year ends on the Saturday nearest September 30. We report fiscal years under a 52/53-week format. This reporting method is used by many companies in the hospitality industry and is meant to improve year-to-year comparisons of operating results. Under this method certain years will contain 53 weeks. The periods ended March 30, 2024 and April 1, 2023 each included 13 and 26 weeks. Seasonality The Company has substantial fixed costs that do not decline proportionally with sales. Although our business is highly seasonal, our broader geographical reach as a result of recent acquisitions mitigates some of the risk. For instance, the second quarter of our fiscal year, consisting of the non-holiday portion of the cold weather season in New York and Washington, D.C. (January, February and March), is the poorest performing quarter; however, in recent years this has been partially offset by our locations in Florida as they experience increased results in the winter months. We generally achieve our best results during the warm weather, attributable to our extensive outdoor dining availability, particularly at Bryant Park in New York and Sequoia in Washington, D.C. (our largest restaurants) and our outdoor cafes. However, even during summer months these facilities can be adversely affected by unusually cool or rainy weather conditions. Our facilities in Las Vegas are indoor and generally operate on a more consistent basis throughout the year. Results of Operations The Company’s operating income (loss) for the 13 and 26 weeks ended March 30, 2024 decreased as compared to the same period of the prior year primarily as a result of continued increases in labor costs in connection with record low unemployment, inflation related to non-commodity related expenses, partially offset by the negative impact on the prior period of the temporary closure of Gallagher's Steakhouse for renovation on February 5, 2023 (which reopened on April 28, 2023). - 21 - The following table summarizes the significant components of the Company’s operating results for the 13- and 26-week periods ended March 30, 2024 and April 1, 2023: 13 Weeks Ended Variance 26 Weeks Ended Variance March 30, 2024 April 1, 2023 $ % March 30, 2024 April 1, 2023 $ % (in thousands) (in thousands) REVENUES: Food and beverage sales $ 41,188 $ 40,913 $ 275 0.7 % $ 87,818 $ 87,452 $ 366 0.4 % Other revenue 1,069 984 85 8.6 % 1,925 1,890 35 1.9 % Total revenues 42,257 41,897 360 0.9 % 89,743 89,342 401 0.4 % COSTS AND EXPENSES: Food and beverage cost of sales 12,138 11,795 343 2.9 % 24,209 24,231 (22) -0.1 % Payroll expenses 15,512 15,311 201 1.3 % 32,488 31,833 655 2.1 % Occupancy expenses 5,775 5,255 520 9.9 % 12,107 11,438 669 5.8 % Other operating costs and expenses 5,836 5,352 484 9.0 % 11,928 11,283 645 5.7 % General and administrative expenses 3,141 3,023 118 3.9 % 6,461 6,159 302 4.9 % Depreciation and amortization 1,057 1,138 (81) -7.1 % 2,149 2,171 (22) -1.0 % Total costs and expenses 43,459 41,874 1,585 3.8 % 89,342 87,115 2,227 2.6 % OPERATING INCOME (LOSS) $ (1,202) $ 23 $ (1,225) NM $ 401 $ 2,227 $ (1,826) -82.0 % _________________________________ NM - Not meaningful. Revenues During the 13- and 26-week periods ended March 30, 2024, revenues increased marginally as compared to revenues for the 13- and 26-week periods ended April 1, 2023. The net increases resulted primarily from decreases in same-store sales discussed below, offset by an increase in sales at Gallagher's Steakhouse at the New York-New York Hotel and Casino in Las Vegas, NV which was substantially closed for renovation in the prior period from February 5, 2023 through April 27, 2023. Revenues for the period from closure through April 1, 2023 were $714,000 as compared to $2,114,000 for the comparable period in the current fiscal quarter. - 22 - Food and Beverage Same-Store Sales On a Company-wide basis, same-store sales increased 0.4% during the 13 weeks ended March 30, 2024 as compared to the same period of last year as follows: 13 Weeks Ended Variance March 30, 2024 April 1, 2023 $ % (in thousands) Las Vegas $ 13,799 $ 12,908 $ 891 6.9 % New York 4,991 4,749 242 5.1 % Washington, D.C. 1,438 1,510 (72) -4.8 % Atlantic City, NJ 763 752 11 1.5 % Alabama 3,567 3,545 22 0.6 % Florida 16,448 17,397 (949) -5.5 % Same-store sales 41,006 40,861 $ 145 0.4 % Other 182 52 Food and beverage sales $ 41,188 $ 40,913 Same-store sales in Las Vegas increased 6.9% primarily as a result of the negative impact on the prior period of the temporary closure of Gallagher's Steakhouse for renovation on February 5, 2023 (which reopened on April 28, 2023). Same-store sales in New York increased 5.1% driven primarily by strong revenues from our event business. Same-store sales in Washington, D.C. decreased 4.8% as a result of lower headcounts and the closure of the property after Sunday after close through lunch on Thursdays for the winter. Same-store sales in Atlantic City increased 1.5% as a result of better than expected customer traffic at the property where we are located. Same-store sales in Alabama increased 0.6% primarily as a result of menu price increase partially offset by slightly lower headcounts. Same-store sales in Florida decreased 5.5% primarily as a result of lower headcounts as compared to the comparable prior period which benefited from outsized volumes as a result of the population increase in Southeast Florida. On a Company-wide basis, same-store sales during the 26 weeks ended March 30, 2024 were consistent as compared to the same period of last year as follows: 26 Weeks Ended Variance March 30, 2024 April 1, 2023 $ % (in thousands) Las Vegas $ 28,643 $ 28,205 $ 438 1.6 % New York 17,080 15,493 1,587 10.2 % Washington, D.C. 3,901 4,328 (427) -9.9 % Atlantic City, NJ 1,318 1,344 (26) -1.9 % Alabama 6,644 6,673 (29) -0.4 % Florida 28,518 30,045 (1,527) -5.1 % Same-store sales 86,104 86,088 $ 16 — % Other 1,714 1,364 Food and beverage sales $ 87,818 $ 87,452 Same-store sales in Las Vegas increased 1.6% primarily as a result of the negative impact on the prior period of the temporary closure of Gallagher's Steakhouse for renovation on February 5, 2023 (which reopened on April 28, 2023), partially offset by lower headcounts in the current period. Same-store sales in New York increased 10.2% driven primarily by strong revenues from our event business. Same-store sales in Washington, D.C. decreased 9.9% as a result of lower headcounts. Same-store sales in Atlantic City decreased 1.9% as a result of lower customer traffic at the property where we are located. Same-store sales in Alabama decreased 0.4% primarily as a result of slightly lower customer headcounts. Same-store sales in Florida decreased 5.1% primarily as a result of lower headcounts as compared to the comparable prior period which benefited from outsized volumes as a result of the population increase in Southeast Florida. - 23 - Costs and Expenses Costs and expenses for the 13 and 26 weeks ended March 30, 2024 and April 1, 2023 were as follows (in thousands): 13 Weeks Ended March 30, 2024 % to Total Revenues 13 Weeks Ended April 1, 2023 % to Total Revenues Increase (Decrease) 26 Weeks Ended March 30, 2024 % to Total Revenues 26 Weeks Ended April 1, 2023 % to Total Revenues Increase (Decrease) $ % $ % Food and beverage cost of sales $ 12,138 28.7 % $ 11,795 28.2 % 343 2.9 % $ 24,209 27.0 % $ 24,231 27.1 % (22) -0.1 % Payroll expenses 15,512 36.7 % 15,311 36.5 % 201 1.3 % 32,488 36.2 % 31,833 35.6 % 655 2.1 % Occupancy expenses 5,775 13.7 % 5,255 12.5 % 520 9.9 % 12,107 13.5 % 11,438 12.8 % 669 5.8 % Other operating costs and expenses 5,836 13.8 % 5,352 12.8 % 484 9.0 % 11,928 13.3 % 11,283 12.6 % 645 5.7 % General and administrative expenses 3,141 7.4 % 3,023 7.2 % 118 3.9 % 6,461 7.2 % 6,159 6.9 % 302 4.9 % Depreciation and amortization 1,057 2.5 % 1,138 2.7 % (81) -7.1 % 2,149 2.4 % 2,171 2.4 % (22) -1.0 % Total costs and expenses $ 43,459 $ 41,874 $ 1,585 $ 89,342 $ 87,115 $ 2,227 Food and beverage costs as a percentage of total revenues for the 13 weeks ended March 30, 2024 as compared with the same period of last year increased as a result of increases in commodity prices, which had been easing for several quarters. Food and beverage costs as a percentage of total revenues for the 26 weeks ended March 30, 2024 as compared with the same period of last year decreased marginally as a result of a strong event business in New York City, which has higher margins, partially offset by higher commodity prices in the current quarter. Payroll expenses as a percentage of total revenues for the 13 and 26 weeks ended March 30, 2024 increased as compared with the same period of last year primarily as a result of record low unemployment combined with merit increases and increasing minimum wages in the states where we operate. Occupancy expenses as a percentage of total revenues for the 13 and 26 weeks ended March 30, 2024 increased as compared with the same periods of last year primarily as a result of increases in base rents and increases in property and liability insurance premiums. Other operating costs and expenses as a percentage of total revenues for the 13 and 26 weeks ended March 30, 2024 as compared to the same period of last year increased primarily as a result of inflation. General and administrative expenses (which relate solely to the corporate office in New York City) for the 13 and 26 weeks ended March 30, 2024 increased as compared to the same periods of last year as a result of annual merit increases. Depreciation and amortization expense for the 13 and 26 weeks ended March 30, 2024 decreased slightly as compared to the same period of last year primarily as a result of certain assets becoming fully depreciated. Liquidity and Capital Resources Our primary source of capital has been cash provided by operations and, in recent years, bank and other borrowings to finance specific transactions, acquisitions and large remodeling projects. We utilize cash generated from operations to fund the cost of developing and opening new restaurants and smaller remodeling projects of existing restaurants we own. Consistent with many other restaurant operators, we typically use operating lease arrangements for our restaurants. In recent years we have been able to acquire the underlying real estate at several locations along with the restaurant operation. We believe that our operating lease arrangements provide appropriate leverage of our capital structure in a financially efficient manner. As of March 30, 2024, we had a cash and cash equivalents balance of $10,412,000. The Company had a working capital deficit of $(7,028,000) at March 30, 2024 as compared with a working capital deficit of $(5,932,000) at September 30, 2023. This increase in the deficit is primarily the result of higher accrued expenses from the collection of catering deposits. - 24 - Inflation The country is currently experiencing multi-decade high inflation. Our profitability is dependent on, among other things, our ability to anticipate and react to changes in the cost of food and other raw materials, labor, energy and other supplies and services. While we have not had material disruptions in our supply chain, we have experienced some product shortages and higher costs for many commodities. There has also been a general shortage in the availability of restaurant staff and hourly workers in certain geographic areas in which we operate and has caused increases in the costs of recruiting and compensating such employees. In addition, certain operating and other costs, including health benefits, taxes, insurance, and other outside services, continue to increase with the general level of inflation and may also be subject to other cost and supply fluctuations outside of our control. While we have been able to offset inflation and other changes in the costs of key operating resources by targeted increases in menu prices, coupled with more efficient purchasing practices, there can be no assurance that we will be able to continue to do so in the future. From time to time, competitive conditions will limit our menu pricing flexibility. In addition, macroeconomic conditions that impact consumer discretionary spending for food away from home could make additional menu price increases imprudent. There can be no assurance that all of our future cost increases can be offset by higher menu prices or that higher menu prices will be accepted by our restaurant customers without any resulting changes in their visit frequencies or purchasing patterns. Cash Flows for 26 Weeks Ended March 30, 2024 and April 1, 2023 Net cash provided by operating activities for the 26 weeks ended March 30, 2024 and April 1, 2023 was $766,000 and $2,111,000, respectively, and resulted primarily due to changes in working capital (primarily accrued expenses), partially offset by a decrease in operating income. Net cash used in investing activities for the 26 weeks ended March 30, 2024 was $596,000 as compared to cash provided by investing activities of $2,998,000 in the same period as last year. This resulted primarily from proceeds from the maturity of certificates of deposit in the prior period partially offset by lower purchases of fixed assets at existing restaurants in the current period. Net cash used in financing activities for the 26 weeks ended March 30, 2024 and April 1, 2023 was $(3,173,000) and $(10,658,000), respectively, and resulted primarily from principal payments on notes payable, the payment of dividends and the payment of distributions to non-controlling interests and in the prior year principal payments on PPP Loans. Recent Restaurant Expansions and Other Developments On June 24, 2022, the Company extended its lease for America at the New York-New York Hotel and Casino in Las Vegas, NV through December 31, 2033. In connection with the extension, the Company has agreed to spend a minimum of $4,000,000 to materially refresh the premises by December 31, 2024, subject to various extensions as set out in the agreement. No amounts have been expended to date related to this refresh. On July 21, 2022, the Company extended its lease for the Village Eateries at the New York-New York Hotel and Casino in Las Vegas, NV through December 31, 2034. As part of this extension, the Broadway Burger Bar and Grill and Gonzalez y Gonzalez , were carved out of the Village Eateries footprint and the extended date for those two locations is December 31, 2033. In connection with the extension, the Company has agreed to spend a minimum of $3,500,000 to materially refresh all three of these premises by June 30, 2024, as extended. To date approximately $150,000 has been spent on this refresh. Each of the above refresh obligations are to be consistent with designs approved by the landlord which shall not be unreasonably withheld. We will continue to pay all rent as required by the leases without abatement during construction. Note that our substantial completion of work set forth in plans approved by the landlord shall constitute our compliance with the requirements of the completion deadlines, regardless of whether or not the amount actually expended in connection therewith is less than the minimum. On September 19, 2023, the Company extended the lease for its corporate office through December 31, 2038. The amended lease provides for rents, beginning on January 1, 2024. The lease also provides for, among other things, the ability for the Company to vacate the premises upon 12 months' notice. Our restaurants generally do not achieve substantial increases in revenue from year to year, which we consider to be typical of the restaurant industry. To achieve significant increases in revenue or to replace revenue of restaurants that lose customer favor or which close because of lease expirations or other reasons, we would have to open additional restaurant facilities or expand existing restaurants. There can be no assurance that a restaurant will be successful after it is opened, particularly since in many instances we do not operate our new restaurants under a trade name currently used by us, thereby requiring new restaurants to establish their own identity. - 25 - We may take advantage of other opportunities we consider to be favorable, when they occur, depending upon the availability of financing and other factors. Recent Restaurant Dispositions and Other Developments During the 13 weeks ended December 30, 2023, the Company dissolved the entity which owned Lucky 7 at the Foxwoods Resort and Casino, which was closed in July of 2022. In connection with the dissolution, the Company reclassified the remaining non-controlling interest balance to additional paid-in capital. Credit Facility On March 30, 2023, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”), with its lender, Bank Hapoalim B.M. (“BHBM”). This facility, which matures on June 1, 2025, replaced our revolving credit facility which was entered into in June 1, 2018 (the "Prior Credit Agreement"). Under the terms of the Credit Agreement: (i) a promissory note under the Prior Credit Agreement in the amount of $6,666,000 was repaid, (ii) BHBM established a new revolving credit facility in the amount of $10,000,000 with a commitment termination date of May 31, 2025, (iii) the Company may use the revolving commitments of BHBM to obtain letters of credit up to a sublimit thereunder of $1,000,000, and (iv) the LIBOR rate option for all borrowings was replaced with the secured overnight financing rate for U.S. Government Securities (“SOFR”). Advances under the Credit Agreement bear interest, at the Company's election at the time of the advance, at either BHBM's prime rate of interest plus a 0.45% spread or SOFR plus a 3.65% spread. In addition, there is a 0.30% per annum fee for any unused portion of the $10,000,000 revolving facility. As of March 30, 2024, no advances were outstanding under the Credit Agreement. As of March 30, 2024, the weighted average interest on the outstanding BHBM indebtedness was approximately 9.0%. Borrowings and all other obligations under Credit Agreement, which include the promissory notes as discussed in Note 8 of the consolidated condensed financial statements, are secured by all tangible and intangible personal property (including accounts receivable, inventory, equipment, general intangibles, documents, chattel paper, instruments, letter-of-credit rights, investment property, intellectual property and deposit accounts) and fixtures of the Company. The Credit Agreement also requires, among other things, that the Company meet minimum quarterly tangible net worth amounts, maintain a minimum fixed charge coverage ratio and meet minimum annual net income amounts. The Credit Agreement contains customary representations, warranties and affirmative covenants as well as customary negative covenants, subject to negotiated exceptions on liens, relating to other indebtedness, capital expenditures, liens, affiliate transactions, disposal of assets and certain changes in ownership. Cash Flow Outlook We are not aware of any trends or events that would materially affect our capital requirements or liquidity. We believe that our existing cash balances, internal cash-generating capabilities, current banking facilities and ability to secure additional financing, if necessary, are sufficient to finance our capital expenditures, debt maturities and other operating activities for at least the next twelve months. Recent Events On May 7, 2024, the Board of Directors declared a quarterly cash dividend of $0.1875 per share to be paid on June 12, 2024 to shareholders of record of the Company's common stock at the close of business on May 31, 2024. Critical Accounting Estimates The preparation of financial statements requires the Company to make estimates and assumptions of future events. In the process of preparing its consolidated condensed financial statements, the Company estimates the appropriate carrying value of certain assets and liabilities, which are not readily apparent from other sources. The critical accounting estimates underlying the Company’s consolidated condensed financial statements include projected cash flows for fixed asset impairments, allowances for potential bad debts on accounts and notes receivable, assumptions regarding discount rates related to lease accounting, the useful lives and recoverability of its long-lived assets, such as property and intangibles, fair values of financial instruments, the realizable value of its tax assets and other matters. Management bases its estimates on certain assumptions, which it believes are reasonable in the circumstances, and actual results could differ from those estimates. Although management does not believe that any change in those assumptions in the near term would have a material effect on the Company’s consolidated condensed financial position or the results of operations, differences in actual results could be material to the consolidated condensed financial statements. - 26 - The Company’s critical accounting estimates are described in the Company’s MD&A included in Form 10-K for the year ended September 30, 2023. There have been no significant changes to such critical accounting estimates during the second fiscal quarter 2024. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not Applicable