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Ark Restaurants (NASDAQ:ARKR) owns and operates 20 restaurants and bars, 31 fast food concepts and catering operations. Seven restaurants are located in New York City, four are located in Washington, D.C., five are located in Las Vegas, Nevada, two are located in Atlantic City, New Jersey, one is located at the Foxwoods Resort Casino in Ledyard, Connecticut and one is located in Boston, Massachusetts. The Las Vegas operations include three restaurants within the New York-New York Hotel & Casino Resort and operation of the hotel's room service, banquet facilities, employee dining room and nine food court concepts; one bar within the Venetian Casino Resort as well as three food court concepts and one restaurant within the Planet Hollywood Resort and Casino. In Atlantic City, New Jersey, the Company operates a restaurant and a bar in the Resorts Atlantic City Hotel and Casino.

The operations at the Foxwoods Resort Casino include one fast food concept and six fast food concepts at the MGM Grand Casino. In Boston, Massachusetts, the Company operates a restaurant in the Faneuil Hall Marketplace. The Florida operations under management include five fast food facilities in Tampa, Florida and seven fast food facilities in Hollywood, Florida, each at a Hard Rock Hotel and Casino operated by the Seminole Indian Tribe at these locations. Restaurants range in size from the The Grill at Two Trees in Connecticut which can seat 101 to the Lucky Seven located in Foxwoods Connecticut which can seat 4,000.

The company’s restaurants generally do not achieve substantial increases in revenue from year to year, which the company considers 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 the company would have to open additional restaurant facilities or expand existing restaurants.

The company’s business is highly seasonal. Q2 of the fiscal year, consisting of the non-holiday portion of the cold weather season in New York and Washington (January, February and March), is the poorest performing quarter. The company achieves its best results during the warm weather, attributable to extensive outdoor dining availability, particularly at Bryant Park in New York and Sequoia in Washington, D.C. (some of ARKR’s largest restaurants) and our outdoor cafes. However, even during summer months these facilities can be adversely affected by unusually cool or rainy weather conditions. In terms of weather, the company’s facilities in Las Vegas generally operate on a more consistent basis through the year.

The weather factor is especially important considering the following information: Several of ARKR’s NYC and DC restaurants have significant outdoor space, such as Bryant Park Grill & Café in Bryant Park NY with capacity for 180 indoor seating and 820 outdoor seating, and Sequoia which seats 600 indoor and 400 outdoor.

The company’s revenue in 2009 and 2008 were highest in Q3 and Q4 and lowest in Q1 and Q2, indicating that colder weather conditions decrease revenue, confirming company’s statements.

  • Stock is currently trading at $14.70. 52 week range is 12.43 - 15.58.
  • NI for Q310 was $4.3m, Q210-(670K), and Q110-(807K).
  • Revenue for Q310-$35m, Q210-$26m, and Q110-$25.6m
  • EPS for Q310-$0.83, Q210- $(0.21), Q110-$(0.21)
  • FY09 Revenue-$115m, EBITDA-$8m, Diluted EPS- $0.87, same store sales decreased 10.4% from FY08
  • FY08 Revenue-$125m, EBITDA-$13.6m, Diluted EPS-$1.93, same store sales increased 0.9% from FY07
  • FY07; Revenue-$124m, EBITDA-$14.8m, Diluted EPS-$3.61($1.28 came from discontinued Ops), same store sales increased 8.6% from FY06
  • Stock is currently trading at $14.70. 52 week range is 12.43 - 15.58.
  • NI for FY09 was $3.1m.
  • As of Q310, the Company had cash, cash equivalents and short term investments totaling $9,130,000 and no debt. 18% of the company’s market cap consists of cash, cash equivalents and short term investments. $2.61 of the company’s share price of $15 consists of cash.
  • Although the company has DTA of $5.2m (as of Q310), the Company expects its effective tax rate to be approximately 32.0% to 36.0%.
  • Food and beverage costs for Q310 as a percentage of total revenues were 25.6% and have remained relatively consistent as compared to 25.5% in Q309.
  • Payroll expenses in Q310 were down 230bps compared to Q309. The decrease was due to the impact of increased revenue experienced during the Q310, as a result of improved weather conditions.

In addition, the company’s business is highly dependent on the success of the gambling industry as detailed further below.

Below is data for the Q310 ended June 30th:

  • Total revenues for the Q310 were $35.2m versus $31.1m in Q309. Total revenues for the nine month period ended Q310 were $85.9m versus $81.7m for the nine months ended Q309.
  • EBITDA for Q310 was $5.2m versus $3.5m for Q309. EBITDA for the nine month period ended Q310 was $5.4m versus $5.1m for the nine months ended Q309.
  • For Q310, the Company’s NI was $2.9m, or $0.84 per share ($0.83per diluted share), compared to $1.6m, or $0.46per share ($0.46 per diluted share), for Q309. For the nine months ended Q310, the Company’s NI was $1.5m or $0.44 per share ($0.43per diluted share), compared to $1.73m, or $0.50 per share ($0.50per diluted share), for the nine months ended Q309
  • Company-wide same store sales increased 9% for Q310 compared to Q309, and increased 1.1% for the nine month period ended Q310 compared to the same nine month period ended in Q309
  • The increase in same store sales was primarily the result of improved weather conditions and greater utilization of the Company’s outdoor seating in Washington D.C. In addition same store sales in New York, increased $1.5m or 29.9% during Q3 as compared to Q309, were positively impacted by the improved weather conditions which allowed for significantly greater utilization of the Company’s outdoor seating facilities. Same store sales declined in locations with high exposure to the gambling industry; 2.7% decrease in Los Vegas, 5.8% decrease in Atlantic City, and a decrease of 9.2% in Connecticut (where the company has a restaurant in Foxwoods).

Data from Q210 Ended March 30th:

  • Total revenues for the Q210 were $25.1m versus $23.8m for Q209. Total revenues for the six month period ended in Q210 were $50.7m versus $50.5m for the six month period ended Q209.
  • EBITDA was $130K in Q210 versus a -$370K during Q209. EBITDA, for the six months ended in Q210, was $185K versus $1,598,000 for the six months ended in Q209.
  • For Q210, the Company’s NI was -$670K, or -$0.19 per share ($0.19per diluted share), compared to a NI of -$710K, or -$0.20per share ($0.20 per diluted share), for Q209. For the six months ended in Q210, the Company’s NI was $1.4m, or $0.40 per share ($0.40per diluted share), compared to NI of $140K, or $0.04per share ($0.04 per diluted share), for the six months ended in Q209.
  • Company-wide same store sales decreased 2.4% in Q210 compared to Q209 and decreased 3.7% for the six month period ended Q310 compared to the six month period ending in Q209.

Data for Q110 ended January 31st:

  • Total revenues for Q110 were $25.5m versus $26.8m in Q109.
  • EBITDA, for Q110, was $59K versus $1.9m for Q109.
  • The Company's NI for Q110 was -$720K or -$0.21 per basic and diluted share, compared to NI of $850k, or $0.24 per basic and diluted share, for the Q109.\
  • ARKR seems to have a shareholder friendly management team. It pays a regulardividend of 25 cents per share. CEO Michael Weinstein has stated in the past, “It has been the policy of our Company to return excess cash to shareholders as long as this policy is consistent with maintaining a strong balance sheet for current and future business needs.”
  • Management intends to continue to pay quarterly cash dividends for the foreseeable future. In the past the company has paid out special dividends. Shareholders received a $3.00 per share special dividend in 2007, a $1.00 per share special dividend in October 2009.
  • Management authorized the repurchase of 500k shares on March 25, 2008. The repurchase plan expired in March 2010.
  • Management compensation makes up a significant chunk of NI. Although total compensation in FY09 for CEO Michael Weinstein decreased 10k y-y it was still 985K. NI for FY09 was $3.1m. Weinstein’s compensation alone is 32% of NI.
  • Some questionable practices from management have occurred in the past; During Q309 the Company made advances against salary to its Chief CEO totaling approximately $300k
  • In addition, the Company also loaned $160k to the CEO’s former wife. The CEO believed the advances and loan were permissible after he consulted with the Company’s General Counsel. The company later consulted with auditors and informed members of its Compensation and Audit Committees and outside counsel and concluded that the advances and loan may be in violation of the Sarbanes-Oxley. The CEO immediately repaid the remaining balance on the advances with interest at 6%. The loan to his former wife was repaid in October before the review had begun.
  • Weinstein is the owner of 24% of the membership interests in each of Dockeast, LLC and Dockwest, LLC. These companies operate four restaurants in New York City, and none of these companies is a parent, subsidiary or other affiliate of the company.
  • Out of the nine members of the board of directors- four are company employees.
  • Michael Weinstein controls 32% of O/S, and total insider control is ~49%. Total O/S is 3.5m and current market cap is $51m.
  • Some numbers for Q310 are listed below:
  • OI-$4.3m, NI (ATTRIBUTABLE TO ARK RESTAURANTS CORP.) $2.9m, Diluted EPS-$0.83, Diluted O/S- 3.5m, EBITDA (a) -$5.2m.
  • OCF was $3.2 for the Q310, Capex was 1,763 which gives FCF of 1.4m for Q310. For FY09 OCF was $7.8m and Capex was $3.8m giving the company FCF of $4m.
  • EV is $42m (51m market cap minus $9m in cash, cash equivalents, and investments). EBITDA for Q310 was very high and using a run rate would give a distorted estimate of EBITDA. EBITDA in FY09 was $8m. EV/EBITDA for the company is 6x which indicates a undervalued stock.
  • JP Morgan estimates $1.30 per share for FY2011 on revenue of 130.01M which gives the stock a forward P/E of 11.5. Subtracting the large amount of cash the company holds makes the stock look even more attractive. $2.61 of the company’s share price of ~$15 consists of cash. Subtracting this amount from the current market shares gives a market cap net of cash equal to 12.39. Using FY11 estimates, that gives ARKR a forward PE of 9.5X. Using a forward multiple of 13 gives the company a valuation of $16.91 plus $2.61 in net cash.

However, I have several questions about the company and would be skeptical of investing in it until I had some answers. I listed the questions, though I have not spoken to IR yet, so maybe it is unfair for me to ask all these questions. But, I doubt they can give me an honest answer with regards to the most important question, my first question listed below.

  • What is with this Weinstein (CEO) guy? He seems to get paid a lot considering how much the company makes, he gave a loan to his ex-wife which the General Counsel supposedly said was okay (I have trouble believing that for a second), can he be trusted? In addition to being CEO, he owns 32% of the shares? He also has a large stake in a restaurant company which competes in NY (as detailed above), where ARK has a large presence. Is this not a conflict of interest?
  • Why is the company not utilizing its DTA? I see the same $5m sitting on the balance sheet for over a year.
  • The company states that revenues do not increase in restaurants y-y which is atypical. Why is that, does the company not have the pricing power to raise food prices?
  • Most of the company's restaurants seat a few hundred; in Lucky Seven they seat 4k which includes the Bingo area. What exactly does that mean; it seems they are trying to inflate the numbers in my opinion?
  • Why is the company not trying to build a brand?
  • I counted on the K I believe over 20 restaurants. Don't they only have 20 restaurants; does it include the fast food?
  • I looked at some press releases which seemed to have contradictions for items like revenue and EBITDA, compared to the Q.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Ark Restaurants: Value Stock or Value Trap?