Ark Restaurants Corp.

Greetings and welcome to Arc Restaurant's second quarter 2023 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 your host, Christopher Love, Secretary. Thank you. You may begin.

Thank you, Operator. Good morning and thank you for joining us on our conference call for the second quarter ended April 1st, 2023. 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, and Anthony Sirica, our President and Chief Financial 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 press release, along with the associated financial tables, please go to our homepage at www.restaurants.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 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. Thank you. Hi, everybody.

Before I get into this, Anthony, I would like to discuss our situation with cash and debt and where we stand, especially in relation to the fact that we increased the dividend from $0.50 annualized to $0.75 annualized.

So please give an answer. Yes, our balance sheet remains strong. The significant items that took place this quarter was on March 30th, right before quarter end. We amended our banking arrangements with our lender. The primary purpose was to move from LIBOR to SOFR, but in connection with that, we paid down a $6.7 million loan, and we implemented a $10 million credit facility, revolving credit facility. Subsequent to the quarter end, we paid down additional two loans for a total amount of $6.1 million. So in total, we paid down $12.8 million of debt between March 30th and April 5th, say. We made the decision because we had a very strong cash position. The rates were over 8%, so this will generate at least $1 million of cash savings over the next year. Also, subsequent to quarter end, you probably saw in the press release, we raised the dividend from 12.5 cents to 18.75 cents per quarter. And our latest cash balance as of today is about $15 million in the bank, and our current debt position is $7.3 million.

So, I think that's pretty much it. Yeah. Thank you, Anthony. So, I'd like to go over venue by venue what we saw happening in the last quarter, but more importantly, what we see going forward. We're just, you know, halfway through the June quarter. So, as the press release indicated, we had very strong sales generated by our events department and catering departments, especially in New York and Washington, D.C., that listed the overall comp sales for the company by about 8 percent. That, of course, It was calculated eliminating Gallagher's in Las Vegas where the comps were inappropriate because we had closed Gallagher's sometime in early February, and it remained closed to the end of April while we did a renovation that was required by our new lease with MGM. Those missing sales were substantial and certainly had a big impact on our EBITDA and net income. But in general, New York was very strong. Alabama and New York remained strong. Alabama was in line with our projections and through the early part of this June quarter, again, remains in line with our projections. Washington, D.C. is the same. It's doing well. Florida had a good quarter, but in the last few weeks, we've started to see a declination in customer counts in the Florida restaurants, in the full-service restaurants. We've also seen a seasonal adjustment in Las Vegas. It's hard for us to tell whether or not we're comping favorably to last year because Gallagher's just reopened, and that's a big driver of sales for us at New York, New York. But I would say to you that it feels a little bit softer than it has been. If you take a look at our customer accounts, in New York, we're doing well in comparison. We have two indicators of how we're doing. Number one, customer accounts is the most important. And obviously, revenues are an equation of customer accounts times increased prices on menus, which would drive Revenues in Florida, customer counts are down, and revenues are starting to comp down slightly in the last couple of weeks. It's very, very hard for us to make a calculation as to whether this is a trend or just a blip. But my belief is that we're losing the low-end income customers from, you know, our full-service restaurants. Our food courts in both Tampa and Hollywood and in Vegas remain very, very strong. But the implications are, you know, we've got to see where Gallagher's winds up. We've raised prices there, and we have a new menu. We raise prices in line with what we think we can ask customers based upon the renovation, based upon the new menu, and more importantly, extremely good quality. If you read the reviews coming, early reviews on Yelp, they're all five-star reviews. I think the team out there has done an extraordinary job. We have Additional renovations to do one on the food court at New York, New York. But that will not have any impact on sales because there are nine units there and we're going to do one at a time. And basically we feel that as we close the unit, the sales that would belong to the unit will be spread over the other units. So, you know, business quality of our product, service of our product. The look of our restaurants remain in extremely good condition. We're very happy with what we're doing in the restaurants. We're a little bit concerned about the bottom rung of our customers, whether or not they can afford to eat as frequently as they did or whether there's going to be a change in habit here during you know, what is apparently a slowdown. I speak to other restaurateurs. They're basically all saying the same thing, especially outside of New York. So that's the restaurant side of it. We should start to discuss Meadowlands more frequently in these conference calls. New York State is about to announce are the three downstate casino licenses. Who gets them? We assume Yonkers Racetrack, which is just north of Manhattan in the Bronx, or Riverdale, and Aqueduct Racetrack in Queens will get two of the licenses. Where the third license goes is sort of a mystery to everybody. I speak to lawyers who are representing different groups who are vying for the license. One of them is Steve Cohn out of Shea Stadium in partnership with the Mets. There are a couple Hudson Yards in New York, SL Green. Nobody seems to know where that license is going. But the fact that Aqueduct and Yonkers are the likely recipients of two of the licenses will have a huge impact on gaming in Atlantic City. And we believe as these licenses are announced, Jersey legislation will have to sort of redeem itself with lost tax revenues out of Atlantic City and make a deal for a casino in the northern part of the state. And we still believe Meadowlands is the most attractive site. Meadowlands, by the way, does more sports betting than all the casinos in Atlantic City combined. I think it's the largest sports betting site in the country. So we think that's a logical choice. There are no environmental permits that need to be explored. We have everything in place. If a casino license was issued to the Meadowlands, we could literally be in business in six weeks. And that's not true with any other venue. So we think that we have a high degree of confidence that the legislators are going to move forward. And it's required that it be a public vote. And hopefully by, you know, November of next year, there'll be a vote on a referendum to allow for a casino in the northern part of the state. We own a, we're the third largest holder of the Meadowlands Racetrack LLC, which is a site we think will be granted a license. That being said, you know, being the third largest, we only have on a fully diluted basis a little under 8%. But we do have an exclusive for all the restaurants in the Meadowlands, with the exception of the carve-out for a Hard Rock Cafe. Hard Rock owns 20% of the deal. A New York developer, Jeffrey Gural, owns some 30%. And again, we're slightly under 8%, and then there are a series of other investors and one... is a hedge fund out of Canada that specializes in casino operations and investments. So with that, if you have any questions, I'm happy to answer them.

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of James Stevens, a private investor. Please proceed with your question.

Yes, good morning. So just talk about the balance sheet for a second. If I understand correctly, as of today, cash is roughly $15 million and debt is roughly $7 million. So we have net cash of roughly $8 million. Is that correct?

Correct. That's before float, but yes.

Yeah. Okay. Okay. So obviously cash is way down from the end of last year, almost down $10 million, but in a good way. So is the debt. The debt is actually down almost $14 million, so it's a much better position. Exactly. And what is the interest on that $7 million of debt?

Yeah, it's about $8 and change, $8.1, $8.2 million. The SOFR approximates LIBOR. It's a slightly different spread. The LIBOR spread was 3.5 and SOFR is 3.65.

So it's still pretty expensive debt. Is there a hope to pay that down further?

Depending how this year shapes up, we would consider that. But we're also looking at a couple of deals out there. So we have to manage that. That's why we didn't pay down more.

Got it. And then in terms of renovations, you talked about Gallagher. It looks like in the release that there's another $4 million that has to be spent on America, and I think another $3.5 million on Broadway Burger. So it's like $7.5 million between the two of them. Is that right?

So let me interject. Broadway Burger is part of – even though it's not under – the same percentage lease as the fast casual food within the village streets, which is our fast food court, essentially. We don't think the renovation of that is going to be more than $2 million. Sam is here. Is that right? Yeah. We think it's $2 million.

We have specific language in the lease extension that says... Once the plans are approved by the landlord, the concept, whatever we're doing, you know, if it comes in below what the lease extension said, then that's going to be the number.

You know, when we negotiated this lease, we didn't know to what extent they wanted these concepts to either change. We knew they didn't want Gallagher's to change. We knew they did not want the fast food court to change. they may want America to change in terms of concept. And we would still be running it, obviously. The present management has been very flexible with us. I mean, Gallagher's was a breeze. We showed them the plans. Sam is here, who oversaw that. Basically, they were very flexible with us. They weren't demanding. They made some suggestions. We tried to accommodate those suggestions, but the suggestions they made were not, you know, heavily priced. So we spent a little under two million bucks in Gallagher's. I can't imagine the food court being more than two million. Based upon what they want us to do in America, which will be a decision next year or the year after. They're not in a hurry to change it. And one of the reasons they're not in a hurry, it keeps doing better every single year. I think we were up 11% in sales last year in America from the year before. So it's even questionable whether they want to change the concept or just want to spruce up. So it's sort of, you know, not something we have to worry about in terms of spending a lot of cash today, if that's the question.

Got it. And you mentioned that, you know, there's a little concern out there for going into recession, a little concerned about the bottom rung customer. What's interesting is Tillman Fertitta was on the other day and obviously they have restaurants, you know, all over and spanning the range from inexpensive to luxury and, And his point was that it was the higher end customer that seems to be impacted. I wonder if that's what you're seeing.

So I speak to his cousins or people who are very heavily involved in Red Rocks. They're starting to see the hiring customers spend a little bit less. That's what I'm told. But basically, our check averages are holding up, maybe with one exception, which is rustic in. But I don't see any problem with our hiring customers and what they're spending. Again, you know, he has a broad range of concepts. But in general, With the exception of the higher end, the crab and shellfish items at Rustic, the menu is not that expensive below those expensive items. Gallagher's is certainly expensive, but it's cheaper than any other steakhouse in Las Vegas. But we're also in a venue that doesn't attract high rollers, and the room rates are substantially less than Bellagio or Wynn, et cetera. The rest of our restaurants are, you know, $40 check averages at dinner, $50 check averages at dinner, and you can eat at price points below that. What Rustic is seeing is because we not only count customers' counts, but we look at the number of entrees sold, they're seeing their customers start to share entrees. So people come and have two appetizers and an entree instead of two appetizers and two entrees. But the rest of it, I think our high-end customer is okay. I think it's, you know, the customer that's renting an apartment in Florida and, you know, has to pay more for groceries and, you know, is just sort of behind the curve here with what's going on with the necessities that they have to pay for and what disposable income they have at the end of the week to go out and eat. I think that's, for us, that's the customer that we're seeing disappear.

I think our high end is different than his high end.

Yes.

He's got mash grows. I mean, he's got these places with astronomical, you know, per person checks. So I think his high end, maybe that section of it is probably suffering.

And, you know, I mean, this is not necessarily pertinent to a conference call, but I was out in Vegas a couple of weeks ago to sit in Gallagher's for a little while. And we have a Tommy Hawk steak there that's 40 ounces served with bone marrow at $129. $140. I apologize. And then I said, who's going to pay this? Because, you know, I'm old and I still remember, you know, a hamburger for $4.95. And Sam took me around to Aria, to a restaurant, and they were $350 or $325 for the same thing. You know, and, you know, we're lower than anybody else on this strip. It's still expensive, but we're lower. And I would think most of our menus... come off that way. We've certainly gone through price increases. We're not hammering our customers. We've frozen price increases for the last six months or seven months. We're worried that at some point customers are going to revolt and say, hey, why am I paying... If you walk around New York City, a $28 hamburger is not unusual. We're at... you know, $17, $18 at Bryant Park for, you know, for a hamburger.

Yeah. No, that's all really helpful. Thank you. And I just have one more question, and then I'll let someone else jump in there. So just in terms of the operating income or EBITDA, because I know you prefer to look at that, It's a little disappointing to see an 8% rise in sales and actually would have been better with Gallagher's and really see on the bottom line or with EBITDA that it's down. And I know there are some factors in there. But are we ever going to get back to these years of $14, $15 million worth of EBITDA? Or is that... You know, obviously, you know, in a worsening economy, you know, it's going to be difficult to achieve that. But all things being equal, especially with the interest savings on paying off some of that debt, are we going to be able to get back there?

We still there? Their line is still connected. Can you hear me?

Gentlemen, are you there?

Yes, I'm here. Can you hear me?

We can hear you, Mr. Stevens. I'm trying to see. Their line is connected, but they're not answering.

Oh, okay. I'll stand by. One moment. Okay, they're reconnected. Okay. Did you want me to repeat the question, Michael?

Yeah. No, I think we were talking about pricing. And, you know, we don't think we're out of line with pricing. We think a lot of restaurants are out of line going into what might be a recession and where people are being more careful. But despite that, and, you know, we're still seeing a slight deterioration.

Okay. Thank you for that. And I had one more question. I'm not sure if you heard it when the line cut out.

Did you?

Yeah.

We didn't hear it.

Okay.

Did or did not?

Did not. Did not.

Please repeat it. Okay. So all I was saying was that you guys are doing a great job in a tough market. It's a little discouraging to see an 8% rise in revenue and actually would have been better with Gallagher's. And so on the top line, it's good to see that, but it's tough to see on an operating income basis where EBIT does. I know you prefer to look at that the numbers lower. And so I guess I'm just wondering, you know, we can't control the economy and the consumer, but all things being equal, is it going to be possible, especially with interest savings to get back to that 13, $14 million worth of annual EBITDA?

I see no reason not to, I see no reason that we shouldn't be better than that. Um, I'm not talking about the results for the fiscal year ending in September. I'm talking about the rate of EBITDA as we turn the corner on the economy. Look, we made a decision here. We're interested in two things. And it goes back to I guess 2008, 2009, when everything was bad and we made a decision at that point, we weren't going to lay off anybody. And if people were going to spend money in restaurants, they wanted to get the experience that they're expecting for those dollars, which were... were difficult dollars for them to spend in 2008, 2009, they didn't want to walk into a restaurant which, you know, had sort of attenuated its full-service approach to save payroll. When that's saving on payroll, if anything, you know, our payrolls are building up, a lot of it because of legislation with minimum wage. We're going through several bumps in payroll sales. legislative minimum wage payroll increases in Nevada, in New York, Florida. So, you know, our payrolls are going up, not down. And we're not letting go of anybody, even if, you know, if sales get crimped a little bit. We're not raising menu prices. We're seeing stability in food prices. Crab prices are coming down a little bit. But for the most part, Everything's remaining stable. We're not seeing things heading down in terms of the products we buy and the cost. Insurance premiums are going up. It's scary what the insurance companies are asking, and we're trying to figure out ways, especially in liability circumstances, To to to get better rates, but we're utility prices are going up. I mean, we're just seeing everything being increased. And yet we're we're going to the mantra here is keep your customer, you know, and customers can't see on the plate that the gas prices are going up or electricity costs are going up or insurance premiums going up. What they know is what they're paying for a piece of chicken in the supermarket, and then they can relate to what they're seeing in a restaurant. So the mantra here is keep your customer. Do everything to keep your customer. And if we do a little bit worse, but we have a loyal customer base going forward, our business will flourish as we come out of this. And as we see You know, what happens to commodity prices? You know, we're even prepared to lower prices to get those customers to think they're getting a quality product at a fair price. And that's where we've been. The whole history of the company has been, you know, take good care of your employees, make sure your customers come back. That's the only song we want to sing. So we might have a little bit of an interruption in EBITDA here, but so what? In the end, we'll be right. That's the feeling.

That's awesome. That's perfect. Thank you. Thank you.

Our next question comes from the line of Alan Goldberg with a private investor. Please proceed with your question.

Hi, Michael. You probably don't remember me, but we had dinner down in Florida. And we are both the same age, so I too remember $4.95 and $3.95 hamburgers. So we are the same age, and I don't know whether that's good or bad. As everybody's aware, Florida is growing, unless something goes on politically down there, but Florida is growing substantially. They estimate 365,000 new residents a year, almost 4 million over the next 10 years. The areas that we are involved in are in the key areas. Have we given any thought to do things, I hate to use the word less popular, but no less populated parts of the state? People that are coming down from New York, Cleveland, Chicago, Pittsburgh, as you know the places, they're shocked at our prices in the upscale areas. Shocked. And so I'm wondering, have we looked into how we can take advantage of that with restaurants in areas that are not so well-known?

That's my first question. Have I lost you? Hello? One moment.

It looks like we lost them again.

Oh, boy. Okay. I'll stay on the line if that's okay. Yes, just one moment. So we're back on. Okay, they're reconnected now. Okay, thank you.

So, Alan?

Yeah, Michael.

Yeah, so you were making the point of the increase in Florida residents.

Correct. And we're finding, I'm finding, I live down there full time, and I'm finding that people aren't going to be absolutely moving to the neighborhood where the house prices start at $9 million. The people that are retiring from the north and the northwest are moving into less popular areas, nevertheless, the same weather. So what I'm asking is, are we looking, have we looked to do anything in lesser affluent areas?

So what drives our decision to make acquisitions is the price we're paying for cash flow, and whether we think that cash flow is sustainable. We don't care where we go, as long as we know we can manage it. And the restaurants we have either bought or secured long-term leases on in conjunction with the purchase of the operation are all institutions. They come with great management. All management has stayed with us, Blue Moon, Shabies, Rustics, Shuckers, you know, they've all stayed with us, and those are the situations we're looking for. You know, we've looked in different parts of Florida, including as far north as Jacksonville. And we looked near Disney. And we looked near Disney, and, you know, we may be a little too conservative in what we want to pay, but we certainly want that margin of safety. There have been deals where we've had an asset purchase agreement with a willing seller and we're a willing buyer and the landlord got in the way and we couldn't get the kind of lease that we wanted, but we can get a good long-term lease like Blue Moon or JB's. We're ready to go. We've looked at A lot of deals in Florida. We're very, very picky, and we have the multiple that we're prepared to pay, and we're really strict on ourselves not to go beyond that multiple.

Okay, and please continue to be picky, but the reason I even brought it up is I was driving from Sarasota across to where I live in the Palm Beaches, and as I got towards the middle of the state, which was farmland, and it looked like nowhere. There was a great big sign, Toll Homes Breaking Ground, 1st of January 2024, starting at $950,000.

Yes, but Alan, not to interrupt, we're not looking to speculate and build restaurants. We're looking to buy cash flow.

I understand.

So the idea is if there's somebody in the middle of the Everglades doing $10 million and throwing off $2 million and prepared to sell the restaurant. You're ready to go there. We're ready to go there. But we're not ready to build there.

I understand. I understand that. So we are looking mostly to lease rather than own the property underneath.

No, our primary focus is to own the land under an operation that we can buy at a multiple so that we have predictable cash flow forever.

That's wonderful. I'm very pleased. I hope we get a little lucky in the Meadowlands. That would certainly be a little more icing on top of the cake, and that would be wonderful. But the main thing, as you say, is to stay alive and keep in business and do what you've been doing for years. Thank you. I'm very pleased. Thank you for your time, all of you.

Gentlemen, there are no further questions in the queue. I'd like to hand it back to management for closing remarks.

All right. Speak to you next quarter. Stay well, everybody. We'll see what happens. Thank you.

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.