Ark Restaurants (NASDAQ:ARKR) Q3 2021 Earnings Call

0:00 Greetings and welcome to the Arc Restaurant's third quarter 2021 results conference call. 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 zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Sonal Shah, General Counsel. Thank you. You may begin. Thank you, Operator. Good morning and thank you for joining us on our conference call for the third quarter ended July 3rd, 2021. 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, Anthony Sirica, our Chief Financial Officer, and Vinnie Pascal, our Chief Operating Officer. For those 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.

1:02 To review the full text of that press release along with the associated financial tables, please go to our homepage at arcrestaurants.com. 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. 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. Hi, everybody. Thank you for joining us.

1:49 I think first I'd like to hand it over to Anthony to review our balance sheet. and then I'll make comments about cash flows and how we're doing in all our venues. Thanks, Michael. Yes, I just wanted to hit on a couple of highlights on our balance sheet since last quarter. Our cash position is $18 million. Currently, it's probably about $19 million after float. So it's obviously reflective of the great quarter that we had. Our cash was about $12 million. at the end of the second quarter. Included in our balance sheet, we had another 3.2 million of PPP loans forgiven, which brings the total to 7.3 million out of 15 million. We have applications pending for another 4.5 million, which hopefully will be forgiven this quarter.

2:45 We also have on our balance sheet receivables for Tax carryback claims that we made given the new requirements that we were able to carry back losses five years that was changed last year. So we have about $2.3 million of refunds pending as well as another $1.5 or $2 million of refunds that we still need to apply for because there's an order in which these things need to be done. Of the PPP loans, we expect approximately $1.5 to $1.9 million will not be forgiven as a result of not being able to spend the money within the covered period of those amounts. The majority of them we will convert to loans at the 1% interest rate and pay off over 24 months.

3:37 The other significant item on our balance sheet happened subsequent to the quarter but is reflected in the quarter was that we had $9.7 million of revolver borrowings that were coming due in May. We worked with our bank to convert them into term loans, which are payable $500,000 per quarter starting September 1, 2021, next month. through June 2025, at which point there's a balloon note on the end. So we've been able to alleviate the pressure of having to pay off that revolver. Everything else on the balance sheet is reflective of the quarter that we had. Receivables are up. Inventories are down a little bit, payables are up a little bit, but all in accordance with the great quarter and the increase in sales that we had.

4:33 I'll turn it over to Michael. I'd like to make a projection that when the tax refunds are received and the monies that are going to be granted, the additional monies, our balance sheet at the end of the September quarter, if business continues as we expect, our balance sheet will probably reflect cash equal to total long-term debt, give or take a few dollars, but it'll be very close. So from a balance sheet point of view, we're in terrific shape. In terms of cash flow, I think the significance of the quarter just ended That $2 million that is missing had to do with several factors. Number one, all restaurants in New York, especially Robert and Brian Park, rely greatly on office traffic

6:03 for both lunch and dinner. Offices in New York are empty, office buildings. Events, there were no events of any significance in this current June quarter. Theater, Hitter, business is closed. Brian Park draws heavily on theater district. And tourism. There's been no tourism. So the fact that we were profitable at all in the New York restaurants is kind of a good result given our dependency on those four factors. So if we look back to the 2019 quarter, Normalizing those four factors, when and if they become normal, tourism, theater district, office buildings, events, it was a great quarter. And what made it a great quarter was our restaurants in the south, Florida, Alabama, Las Vegas. We're seeing numbers there that are spectacular in terms of headcounts coming into those restaurants.

7:14 Vegas is interesting because we're doing record business, weekly business compared to comparable weeks in 2019, but there's no convention business in Vegas. So it's all tourism at this point. We're also dealing with the handicap of venues being affected by different regulations at different times, as mask wearing, is necessary now again in Vegas. During the June quarter, some of our restaurants were only allowed to have 50% occupancy. It's messy, but we prevailed and did really well.

8:01 Our management in these various venues had to deal with a lot of requirements for them to be flexible. They did a great job. There's no shortage of COVID cases in our restaurants at various times. So, you know, we seem to always have a few people out with COVID, fortunately, like cases. But everybody has to work harder because you can't replace them for the 10 to 14 days that they're out because the labor pool is very limited. Very diminished right now. So, all in all, a great quarter. What we're seeing in the current quarter, July started out just like June.

8:56 Really, really strong as we got into August with the Delta virus. We're seeing a little bit of dampening. It's hard to tell whether that's the Delta virus or just seasonality. We suspect it's a little bit of both. But the quarter should be a good quarter. And we are seeing, despite the Delta variant, significant bookings for events in the fall. Whether that continues, given the Delta variant or not, I think we had, in terms of event business, some feeling on are part of people that book these events.

9:44 That COVID was on the decline, and it was a period of time when our office got very busy booking, again, the fall and winter. Whether that continues now that there's concern about the Delta variant, I don't know. But so far, we don't have any cancellations. I think there's a wait-and-see attitude about this. In terms of pricing, We've been able to get some increases on our menus. We've been doing that gingerly. We don't want to scare customers. Our margins are being compressed a little bit by food costs.

10:30 I tell the story about Rustic in Fort Lauderdale where our food costs are up 10%, but one item that used to be a 50% cost item is now an 88% cost item, King Crab Legs. A lot of it has to do to disruptions and distribution. Some of it has to do with the fishermen aren't out fishing, so the supply has been cramped down. But we've taken the attitude that where a product is part of our brand, and King Crab Legs and Dungeness Crab and Rustic, they're famous for that. We probably serve 200 orders a day of those two products.

11:19 That we don't want to scare off our customer. So we're taking the hit. And our menus don't even begin to reflect that. What our costs are in Rustic and in some items on other menus. So there'll be a squeeze in margins, but the foot traffic coming into our restaurants, a la carte traffic, has been strong enough and these restaurants remain extraordinarily profitable in terms of the cash flow they yield. So I hope that gives you a sense of where we are right now. If you have any questions, please ask now. Thank you. We will now be conducting a question and answer session.

12:06 If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. One moment, please, while we poll for your questions. Our first questions come from the line of Roger Lipton with Lipton Financial Services. Please proceed with your questions. Yes, hi, Mike. Excellent quarter, obviously. I've just got to chime in for a second. I see that just in the last couple of days, Jay Alexander's reported, and they have an interesting comparison In terms of a thin stock, it's always been too cheap.

13:03 And they are about to go private. And they're about to go private at about seven times their current run rate of EBITDA. And your stock, as you well know, is trading at about two and a half times your current run rate of EBITDA. So... It would seem that you ought to be considering some sort of corporate activity, whether it be in the form of a stock buyback, perhaps reinstating the dividend, or even considering going private. Being public has not generally served the company particularly well over the last 30 years because you haven't sold any corporate stock to the public. And so it would seem that if I were in your shoes, you and your family could get a great deal of current liquidity as well as a remaining equity participation in the future.

14:10 And the current shareholders could be taken out at a very substantial premium to the current price. So those are my thoughts at the moment. You want a response or are you just making a speech? I'm making a speech, but I'd be interested in your thoughts in terms of a response. The stock is incredibly inexpensive. So, Roger, a few things. Regarding dividends, I think it's inappropriate to be handing out dividends, and certainly I benefit from that as well as everybody else. But handing out dividends at a time when there's still a great amount of uncertainty with COVID and at a time when we're taking loans from the SBA and converting them into grants.

15:06 There's something that doesn't smell right to me about that. In terms of a private transaction or buying back stock, Obviously, we're aware that the stock probably does not reflect current operating results. There are two factors that would weigh heavily if we were even discussing this, which we're not. Number one is our leases in Las Vegas. They have 17 months to run. We're beginning to, you know, as you know, MGM, which owns New York, New York, has gone through a significant restructuring of management.

16:04 The people that we had a constant partnership with, because in New York, New York, we're essentially a food and beverage department, have all, with the exception of one They've all left. They've taken buyouts. And so we have a meeting in September, beginning of September, with them to start to discuss what the relationship will be going forward. And the fact that they are having a meeting with us means there's some interest at the end of 17 months in having us continue. But we don't know what... That's going to be, structurally.

16:51 So, there's a risk in that that some of that cash flow, or all of it for that matter, will go away. So, I think buying back our own stock or having anybody be aggressive at this moment would be foolish. Number one. Number two, There's the Meadowlands, which unlike the potential negative of New York-New York's negotiation, which we, by the way, we're optimistic about, but you have to consider that it might be a minus as opposed to a positive.

17:38 But the Meadowlands to us is a huge positive. First of all, were probably the largest sports betting facility on the East Coast. As you know from prior conversations, we cannot take in income unless it's distributed because of our minority interest in that. That minority interest of around 8%, our partners are Hard Rock and Jeff Corral, who's a real estate player in New York, with the are third on the totem pole in terms of ownership. But the geometry of that investment that we made five years ago can be really significant to our current shareholders, some of whom I know have their eye on that and are comfortable owning our stock despite the fact that it doesn't reflect current operations.

18:42 and Cash Love. So sports betting has been a significant, significant cash contributor to the Meadowlands. We're paying down debt. And for the first time, I think this year, Meadowlands will make its first distribution. That will not be an insignificant number to ARC that we'll be allowed to report. But more importantly, as New York... State starts to play out with the downstate casino licenses which there's been a moratorium on because the guys that built upstate had a deal with Cuomo essentially that nothing will happen downstate until 2023 which will give the upstate guys time to recapture some of their capital investment. But you have MGM owning Yonkers, you have Getting owning and the Catskills and you also have Venetian bought a block of property in Queens and there's a lot of lobbying pressure going on to try to get those downstate casinos issued prior to 2023 and But even if we wait until 2023, once those downstate licenses

20:12 are issued, we don't see any way in which New Jersey doesn't react and make Meadowlands a casino. And if it were to become a casino, I would tell you that our projections, just casino operations, would dwarf Our current EBITDA, our percentage would dwarf our current EBITDA, in addition to which we have an exclusive on all food and beverage if it becomes a casino with the exception of a carve-out for our Iraq cafe. So, to me, you know, I think our current shareholders should have the advantage of that and, you know, it...

21:03 If we were to do a private transaction, I think it would be very hard for us to come up with a number that would be fair to our current shareholders or anybody who buys the stock here, given that the Meadowlands could be just two or three years away. I think we would become a company or Myself or whoever joined in the private transaction, we would be under a great amount of scrutiny. What we knew at the time we did that transaction, and if the Meadowlands becomes a casino, I think it would be a very unfair transaction for us to initiate, given that we here really believe that's going to happen. What happens is not...

22:00 We may be wrong about our belief, but if it were to happen, any transaction we did here would be very unfair to long-term shareholders or short-term shareholders who buy the stock with that in mind. So there's no private transaction that's going to happen here. Mike, thanks for the... Thank you, Michael. Thank you. Our next questions come from the line of Jeffrey Kaminsky with JJK Consulting. Please proceed with your questions. Good morning, Mike. Congratulations on a terrific quarter in a very challenging environment. I just had a couple of questions, some stuff that we have discussed in the past, but the first one being a question that I'm not sure you can answer, but What do you think, or what's your assessment of the robust numbers that you delivered the last quarter as it being a function of pent-up demand and everybody going back out versus sustainable business and growth? Is there a way to monitor that, that at some point things will level out? That would be my first question.

23:22 I'll let you answer that, then I have another question. Thanks. All right. Thanks, Jeffrey. I hope you're well. So obviously there's pent-up demand, and you would have to go area by area of the country where we are. In New York, I don't think we're getting pent-up demand. The people are back out eating. You know, as of yesterday, now you have to show a passport, you know, COVID passport to eat indoors. So, you know, there's a dampening effect. I would also tell you New Yorkers, even though, you know, Manhattan is probably one of the safest places if you go by the number of people vaccinated, you know, we had people who just don't want to eat inside.

24:16 So Robert, which has no outdoor seats, obviously, on the ninth floor of a museum, Our business has been terrible, terrible, you know, as people have been hesitant. And those factors I mentioned earlier, events, tourism, theater, you know, occupancy and office buildings, Robert's lost money every single week. So pent-up demand has not helped Robert, and I don't think it's helped, you know, if you go to Bryant Park, you know, All the dining is outdoors. It's not indoors. And if it's a rainy day, we're not doing any business. So I don't think New York has been helped by pent-up demand.

25:01 The residential neighborhoods, the Upper East Side, Tribeca, those properties are doing well. They're seeing all that. We're in the corporate midtown area where the buildings are empty. So that's why we're not seeing it in our restaurants. In Washington, D.C., Thank you very much. In Florida and Alabama, they're nuts. Nobody wears masks.

25:51 They may be pent-up demand. I think there is. So, yes, I think we're benefiting from that. But I got to also tell you that, and I'll say this in terms of everything we own, anywhere, we have premier locations everywhere. We have great reputations. We have great brands. These businesses, I remember after 9-11 in 2001, you know, the banks were all over me because we were losing a half a million dollars plus in cash every single day, every single week after 9-11 because at that time we were in Las Vegas, Washington, D.C., and New York, and all of them were gigantically affected by 9-11.

26:43 I said to the banks, these are great properties. The minute people start to come back to restaurants, they will fill up. Well, that's what's happened in general. But without a question, I think pent-up demand and the fact that alternatives are not available. Movie theaters in Florida. People have used restaurants more so just to escape than before. I think that's true in Florida. In Alabama, we're doing the business we expect to do in the June quarter and going into the September quarter because our Alabama properties, this is their season.

27:32 When I bought those properties, I thought they would behave more like Florida. They behave more like Jersey Shore than Alabama. and Florida. So this is their season. Vegas, I think, is benefiting from people who want to travel, who might have gone to Europe or Mexico or something. They're looking for some place to go. And Vegas remains a cheap vacation. But The numbers we're doing in Vegas, which are better than our 2019 comparable numbers, are being done for most of the quarter. The shows weren't open, and there were no conventions.

28:19 And for part of the quarter, Vegas was 50% occupancy. So the numbers we're doing there are staggering. And I think that'll continue. The occupancy in Alabama is large. For a period of time during the June quarter, Vinny's telling me we were 50% occupancy as well. Yes. But the numbers you're seeing from us in the June quarter were largely created from mid-May to the end of June. That's when business got really, really good. So that's the answer to your first question. Yes, I think, you know, in all of these venues, the pure increases that we're seeing above what our expectations were are probably you know Florida centric I can give you reasons why we're doing less business than we should be doing i.e.

29:22 conventions in Vegas Alabama is sort of where we expect it to be and New York isn't getting any advantage you know so I think, you know, part of the sales numbers, by the way, are also where we did increase menu pricing. But in Rustic, for instance, where we're seeing good numbers, but our food costs are, you know, terrible. We looked at the 2019 headcounts and were basically where we were with 2019 headcounts. Now, that's interesting also for Rustic in particular, because Rustic is four seconds away from the cruise ships, and there have been no cruise ships.

30:11 And we do a significant amount of business when cruise ships are sailing, but they haven't been sailing. So I can make a comment that would be the same as New York with events, you know, tourism, office buildings being occupied, etc., Give me back the cruise ships and Rustic would do 20% more. But we don't have those right now. So I think there are a lot of reasons to believe that these sales are real and in many cases will do better as the world gets back to more normal. Second question, Jeffrey. Yeah. So your strategy in the last several years of making some acquisitions of family-run, mom-and-pop type restaurants that have good reputations and good business models in their respective community has worked very well for ARC.

31:10 Given... A post-COVID world or the COVID world that we live in, I am assuming that there are a number of operators that have either closed down or are limping through this and have not been in the fortunate position that ARC has been in. That said, I'm assuming the broker, the business broker that perhaps shows you some of the properties that you've acquired over the years must be showing you some either vacant properties available or people who just can't continue to hold on like this are currently in the position to make another acquisition. I know you talked about the loans being forgiven from the government. Are you seeing a decent show of potential restaurants, and are you in the financial position to make a move if something attractive came along?

32:01 So we're more liquid than we've ever been on our balance sheet. So, yes, we don't have to go to banks right now to make acquisitions. number one. So yes, we're certainly in a position to make them. I'm sort of, I had a conversation with a board member, one of our board members the other day, you know, our criteria, what we're going to pay as a multiple of cash flow has always been really, really conservative. You know, we believe that we're trying to eliminate The margin of risk as best we can. So we paid, I mean, in Blue Moon, I think we probably paid in the end two and a half times or three times cash flow.

32:53 At Rustic, because we bought the land, if you take out the land at Rustic or Shuckers or the Alabama properties, you know, we probably paid three times. Those deals don't come along very often, but the fact that we could be an all-cash buyer for people who want to get out of the business is what makes us an attractive candidate for them to sell into. And the fact that there aren't all-cash buyers around because... Locally, people are used to buying things for 30% down and 8 years of notes. And when you're talking to somebody who's 92, they're not interested in 8 years of notes. And the brands don't want them because they don't extend the brand.

33:38 So we sort of slip in there with an attractive alternative for people who want to sell. What's happened is we got Blue Moon in October of last year just before things started to change. I think if those guys who I've become friendly with knew where our sales and what efficiencies we had put in place and the cash flow we're getting out of, they would not be sellers today. I don't think it's easy to find sellers right now in the markets that we're interested in because everybody's doing a lot of business. So if you survive to this point, Right now, you should be happy.

34:27 There's less competition because a lot of restaurants are closed, which is another factor in your first question. But we're not seeing anything that we're really interested in right now. But we'll wait. We'll find something. And our preference is all to land underneath the operations. But we'll find things. I'm not concerned about that. They'll come. Thank you, Michael. Stay healthy. Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. There are no further questions at this time.

35:13 I'd like to hand the call back over to Michael Weinstein for any closing comments. Well, thank you all for... Joining us, Roger and Jeffrey, thank you for your questions. We'll see you in September. I'm sort of curious how this all works out for us in the September quarter with the Delta variant and what impact that has. But going forward, we're very, very positive about our business. And we're very proud of the people that worked for us and what they have done. and the sacrifices they made to get us to the point where we're making a lot of money again relative to our size.

35:59 This was really difficult to get through and I'm just thrilled at the cooperation we've had from everybody, including people at Blue Moon who, you know, had to take on new ownership not knowing us very well and implementing a new way of doing business because we're a public company and the standards that they had to come up to in the middle of all of this stuff. Everybody's done a great job for our shareholders and that's the reason this company is as strong as it is.

36:54 So thank you and I'll speak to you in October. November. December. It's our year end. It's our year end. Okay. Stay healthy everybody. Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Have a great day.