Ark Restaurants (NASDAQ:ARKR) Q1 2020 Earnings Call

0:00 Greetings and welcome to the ARC Restaurant's first quarter 2020 results conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Sonal Shah, General Counsel. Thank you, Operator. Good morning, and thank you for joining us on our conference call for the first fiscal quarter ended December 28, 2019. My name is Sonal Shah, and I'm General Counsel of ARC Restaurants. With me on the call today is Michael Weinstein, our Chairman and CEO, Vinnie Pascal, our Chief Operating Officer, and Anthony Sirica, our Chief Financial Officer.

0:51 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 press release, along with its associated financial tables, please go to our homepage at www.arkrestaurants.com. Before we begin, however, I'd like to read the Fife 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. 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 now turn the call over to Anthony Sirica, our Chief Financial Officer.

1:45 Hi, good morning. Before Michael starts his commentary, I just wanted to make everyone aware that we adopted the new lease accounting standards in the first quarter. As a result, our Q1 balance sheets include operating leased assets of $60.7 million and leased liabilities of $62.5 million. The new standard did not materially impact our consolidated net income and had no impact on our cash flows. I'll turn it over to Michael. Hi, everybody. This is a fairly decent quarter. We expect EBITDA increases to continue come here on it as well. What's really driving the better results are properties in Florida, Alabama.

2:37 A better result in terms of comp sales is Sequoia in Washington, D.C. Stability in New York and stability in Las Vegas. There's not much really to say. It was just a good quarter. I think we're operating well. We certainly have our challenges in terms of operating expenses. Insurance premiums continue to increase at highly inflationary rates. Our New York City restaurants seem to be impacted somewhat by food delivery. That is not as true in Washington or in Florida or in Las Vegas, but in New York City it seems to have an impact.

3:29 Minimum wage increases in New York City are done in terms of the three years of roll-in of legislative increases, so we now have some stability in payroll. We could probably do a little bit better job with certain of our contract expenses, monthly expenses in the restaurants, renegotiating them, and we're going to take on that task soon. But overall, just a really solid quarter. Everything was open this quarter. We were down at the Hard Rocks in Tampa and Hollywood during the summer of last year. Those reopened in time for the first quarter of our new fiscal year, so we had full operating results from them.

4:22 I should mention that JB's on the Beach was profitable in line with our expectations, but they really don't get into season until late December. We expect much better results from them in the March and June quarters when the seasonality of the business picks up our sales and our operating profits. With that, if you have questions, I'd like to answer them. There's not much more I could say. We're just doing, I think, a good job at this point. Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue.

5:09 You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. First question comes from the line of Bruce Geller of DGHM. Please proceed with your question. Hey, good morning guys. Congrats on a nice quarter and on a clean quarter for once. There didn't seem to be too much noise in there, so that was good. So with JB's, you mentioned that we should see a ramp up in the current quarter.

5:55 I think you've got about six weeks of the quarter under your belt. I'm just curious if it's operating according to your expectations. And then also, can you comment on the potential sale of the related land around JBs, which you guys do not own, and how that may impact you positively or negatively in coming periods? Thank you. Sure, Bruce. Hi. Nice to speak to you. So January is in line with our expectations. The sales are where we expected them to be.

6:40 Profitability is about what we expected. You know, when we buy these things, we generally leave them alone for a while and rely on the general managers to... guide us because they have the history, they know the markets better than we do. The only thing that I would tell you when we took over Rustic and when we took over Shuckers, we thought they were priced not in line with value. And we think JB's has some elasticity in prices and We're putting in a new menu pricing on the 19th of this month.

7:28 So that's the only move we've made. I don't know how that will impact sales and the P&L going forward, but it's more than a minor price increase. Minor price increases being 2%, 3%. I think this is a 5% or 6% price increase. But With all that being said, right now the operations are exactly what we expected. In terms of the land under the restaurant and the parking lot across the street, when we bought the operation and in turn gave the owner or negotiated with the owner a lease for 25 years, Part of that lease requires him to maintain 121 parking spots for us to our approval.

8:34 The parking lot, which is across the street, is a big driver of revenue into the restaurant. The accessibility, the proximity to the restaurant, makes valet parking very, very easy. Without those 121 parking spots, I would think we would see a dip in revenue. So that is tied into our lease. He is trying to sell the land and the parking lot at what we think is a number far in excess of what the value should be. We have a right of first refusal. If he got anywhere close to what he's asking now, we would not exercise that right.

9:22 But whoever bought that property is locked in to providing us with 121 parking spots. We think that makes a transaction with anybody else somewhat difficult unless they have a lot of patience or willing to wait 24 years to get a release of our lease. Right now, it doesn't bother us one way or the other. If he sold it for a big price, good for him, but we would still have the 121 parking lot spaces with 24 years left on our lease. We're not concerned with any revenue impact of a sale. Okay, great.

10:07 Can you talk a little bit more about The metrics at Sequoia, how that's ramping up this year, considering you've made a pretty substantial investment there, and I know it's been a struggle until now. I'd be interested to know how it's ramping up. Well, for the quarter, we were up 14% in comp sales. That doesn't translate easily, by the way, into necessarily more operating profit at the restaurant. We're We want to make sure service is great. We had some minimum wage increases in Washington, D.C. Again, the expenses of insurance have risen. We're doing better. We expect a better operating profit for the year than we did last year. The Catering is starting to take hold. We expect a million dollar increase for the fiscal year in catering revenue.

11:11 That's highly profitable incremental revenue. So it is ramping up. It's just not ramping up as fast as we thought. We are doing things to try to hasten the ramping up. We're looking at PR companies. We think food is good. We think the Maintenance of the facility is great. We're doing everything we can. We're lagging on a ramp up in a la carte business. We're not lagging anymore in private events and catering. That's moving forward at a nice pace. It's still the a la carte business that's lagging. It's hard to tell...

12:00 How much is lagging because our season doesn't start really until late April when we have the 600 seats outside. And during the winter months, that location is not as accessible as it is during the summer months when people come out and want to sit on the river and drink. It's just a dead area during the winter months. And all the other restaurants in the project... experienced the same lull. So it's really in the spring and summer we're going to find out whether or not we built something that people want to gravitate to. Great. And then just two more quick questions. On the last call you mentioned that at this point you might have a little more something to say regarding your lease negotiations in Vegas.

12:55 So I'd be curious if there's anything further there. and then finally if there's anything further of note at the Meadowlands. So Meadowlands is easy. Nothing going on at the Meadowlands other than we're I think the busiest sports betting site certainly in the state and maybe in the country. So that makes Meadowlands securely profitable. It also proves the demographics of the site. We both do online and sports betting as well as on-site sports betting. Our partner in that is FanDuel.

13:41 They're doing a great job. They're putting a lot of money into the facility, more betting machines, more TV sets. So that's all going well. To the extent that it proves that the demographics around the Meadowlands are ideal for a casino, that would probably have some weight going forward if legislation is passed to change the Constitution to allow for full casino licenses outside of Atlantic City. But we don't think anything seriously will be considered by the New Jersey State Legislature until New York has downstate betting and that's probably going to come next year and we'll see how New Jersey reacts. But until now, the Meadowlands is profitable. We're not putting any money into it.

14:40 We're not taking money out of it. That's the best answer I can give you. In terms of Vegas... We've made a proposal based upon a conversation we had with the upper tier management at MGM related to extending the lease another 15 years. We had some advantages in that negotiation with non-union, with grandfathers as non-union. We think that's a big deal. We provide New York, New York with a great deal of rental income.

15:30 That first document from my understanding was received well. MGM keeps on changing personnel at the top. We're due for a meeting pretty soon. I am told By people who I rely on, on the MGM side, that it was received favorably, our proposal. I don't know exactly when we're having additional meetings. We're three years away from at least terming out. So we have some time, but we're trying to get this done as early as possible. So that's where we are.

16:15 I really have no definitive answers for you other than we gave them a proposal and I'm told it was received favorably. Great. Thanks a lot. My pleasure. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Jeffrey Kaminsky of JJK Consulting. Please proceed with your question. Hi. Good morning, guys. Congratulations on the next quarter. Thank you, Jeffrey. Just one topic to touch base. Pretty much everything else has been discussed. You had gone into some detail on the last call about an endeavor out in Ohio, whether it be partnering in some restaurants or consulting on some restaurants. How's that going and when do you expect to see any revenue out of the project?

17:06 First of all, we don't have signed leases yet, but we are working on three projects. Restaurants within the complex, which is Eastern Ohio. Just to repeat, Eastern Ohio sees 30 million visitors a year. It's the most upscale shopping in the Midwest. It's a town with a lot of retail space, 52 restaurants right now, and expanding. So we have hired architects. We've hired branding people and designers. We've made a deal with constructions, GCs.

17:56 So we're moving ahead even though we don't have signed leases because we're trying to get three restaurants open essentially right around the first quarter of our next fiscal year. So there's no impact this year other than We're spending some cash on all of these architects and brand people and designers. We're confident we're going to sign three leases. We'll see how those restaurants open. We have the opportunity to do more. We have, I think the leases are fair tenant landlord leases, operating costs in Columbus are lower than they are in New York City, and we think we can do the same volume that we would do in New York City at one-third the rents and more favorable payroll numbers than we would have operating here.

18:59 So what I'm basically saying is Columbus is, to us, somewhat similar to the operating advantages away from New York that we found in Florida and Alabama and in Las Vegas. So we start off with a more favorable equation. Obviously, that means not the restaurants through the revenue that we expect, but we sort of have a way based upon the other restaurants of similar size at what the capacity is for revenue for these new locations. So we're very comfortable moving forward, and we have a developer landlord who we have a very good relationship with.

19:49 So I think leases will start to be signed in the next couple of weeks, but as I said, we're moving forward with design to get these things open on the schedule. Thank you. We have reached the end of the question and answer session. I will now turn the call back over to Michael Weinstein for any closing remarks. Well, thank you for being on the call today. As I said, I think the comparable results that you saw in December quarter will continue into the March and June quarters, which should have a very good year. Look forward to the next phone call. Thank you. This concludes today's conference You may disconnect your lines at this time Thank you for your participation and have a great day