Welcome to Ark Restaurants fourth quarter and year-end 2022 results conference call. At this time, all participants are on 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 for Ark Restaurants. Thank you. You may begin.
Thank you, operator. Good morning, and thank you for joining us on our conference call for the fourth quarter and year ended October 1st, 2022. My name is Christopher Love, and I am the Secretary of Ark Restaurants. With me on the call today is Michael Weinstein, our Chairman and CEO, Anthony Sirica, our President and Chief Financial Officer, and Vincent Pascal, our Chief Operating Officer. For those of you who have not yet obtained a copy of our press release, it was issued over the Newswires 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.arkrestaurants.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 direct bearing on our operating results, performance, and financial condition. I'll now turn the call over to Michael. Thank you.
Hi, everybody. Thank you for joining us today. The comparisons of the September quarter this year with the September quarter of last year are affected by two segments of our expense side. One is a substantial increase in payrolls, and the other is a substantial increase in occupancy costs. In order to try to get the flow of the business correctly stated of where we are, I wanna first have Anthony explain occupancy costs and how the September quarter this year compares to the September quarter last year. What were the big differences? There were adjustments last year which sort of inflated EBITDA in the fourth quarter, and there are adjustments this year which sort of deflate our EBITDA in the current September quarter. Anthony.
Last year, we had adjustments related to the finalization of some COVID abatement deals that were recorded in the fourth quarter. What happened was there were several landlords where we were negotiating, still negotiating COVID rent abatements in 2021. We were still accruing the normal base rents the whole time because accounting, you know, according to the accounting standards, we couldn't record any abatements until we had signed deals. Those deals were signed last year in the fourth quarter, and, you know, they were recorded, which reduced occupancy last year by about $800,000-$1 million.
In the current year, we also had some adjustments to occupancy costs related to the Vegas leases finalized in July and August for percentage rents that needed to be accrued back to, you know, the beginning of the year based on the final deals. All in all, you know, you're probably looking at, you know, $2 million swing between those two items, and that's why the occupancy looks so odd.
Basically, last year, we reversed an accrual of rents for the full year of our fiscal year 2021 in September, which created a $1 million increase in EBITDA, essentially, based upon that accrual. This year, the opposite happened. Because we didn't have signed leases in Vegas, we weren't allowed to accrue for the full year as the year was going on until the leases were signed. Essentially, those rents for the full year, because we had to go back to January 1st, 2022, were about $1 million that fell into the fourth quarter. There's a $2 million swing here. I like to address payroll costs. That's the other big item. Payroll went up roughly $2.8 million compared to last year's September quarter.
What's interesting is the payrolls now, as a percentage of sales, mirror what was our pre-pandemic percentages on sales, in the same quarter before the pandemic.
Quarter and year.
Year-end. We're back to essentially full employment. I may have made a mistake. As labor started to loosen up, my directive to all my managers was because we couldn't find good people, we were having trouble finding good people for these restaurants. We were having a lot of turnover. We would hire people, they would leave after three, four, five weeks. It was a mess. As the market opened up a little bit, especially in Vegas, and I wanna talk about that a little bit more, the directive was just find the right people. If we have to pay them more, which we're gonna have to pay them more, just get them on board.
That stood us very well in 2008, 2009 when things got very rough for us. We said that our customers were gonna have a tough time spending money in restaurants when the economy was really tanking. The last thing they wanna do is if they spend money in a restaurant is see bad service because we don't have enough people to service them. Basically, we don't wanna be in that position going forward. Markets started to ease up with good people to fill these jobs that had been vacant or jobs where we didn't have the right people. Went out and hired them, and we're paying a lot. In the end, we're back to pre-pandemic levels.
The September quarter, essentially, our sales increased $4 million. We had this $2 million swing from the September quarter last year in rents, and we had a $2.8 million swing in labor costs. That sort of will get you to where the differences, the main differences were and how they occurred. In terms of our business, the September quarter, we were not raising prices aggressively at all. In many of the restaurants, we just stopped. It's an art form to try to figure out what the elasticity of pricing could be in some of these restaurants. But we're at prices that are sort of, especially when you've been in business 50 years, are sort of unfathomable to me.
Even though they may be rationalized by the cost, it doesn't mean that the customers are gonna look at them and feel comfortable paying them. This is especially acute in Rustic Inn in Florida. We're now serving, you know, a two-pound order of king crabs. I always go back to this as an example. It costs us 85% of the sales price to put that on, you know, to put that dish out. We're charging $135 for it. It used to be a $75 dish. I would tell you one out of four people who go to the Rustic Inn go there for that dish. It used to be a 50% food cost, but a high dollar profit. Now it's an 85% food cost.
The fact of the matter is, even though we're almost giving it away, our customers can't afford it. They're now sharing it. People are not coming as frequently for it. We have a blue-collar crowd there. It's just, you know, it becomes a celebratory when people have anniversaries or birthdays, but we're losing headcounts there. Our business in the September quarter was down some 20%+ in Rustic. and that sort of had a big impact on our EBITDA as well. That's an extraordinarily profitable restaurant. The rest of Florida, we're doing fine. Our food courts and the two Hard Rocks performed well. JB's, Blue Moon, Shuckers all performed well. Alabama performed very well. Las Vegas performed very well.
New York is performing well because of significantly increased events and price increases that we put through to people having events which have been readily accepted. There seems to be a big pent-up demand for events in New York and Washington, D.C. The business is fine. We did $4 million, as I said, in increased sales. The two big items which need to be understood as to why the comparison looks significantly different between last September and this September's quarter are rents and those reversals of accruals last year and the increased accruals this year, and labor. I think we're in very good shape with labor now. I think we're gonna get more efficient with labor as we hire better people.
I think the headcounts of the number employees we have will sort of go down because in many cases, we had two people doing the job of one person. We had a lot of overtime. That's gonna start to be eliminated. I think we're gonna become more efficient. I'll open it up to questions now.
Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session.
I think you understand the whole.
If you'd like to ask you a question, you may press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two 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 Paul Johnson, a private investor. Please proceed with your question.
Good morning, thank you for the explanation around those numbers. I guess the tricky thing is to try to predict what is sort of a normal level of payroll and occupancy costs. I'm wondering, I know you don't give forward guidance, but all things being equal going forward for, let's say, the next fiscal year, do you think that we should be using this level of EBITDA, let's say, going forward? Again, obviously not predicting what can happen in the economy and traffic and all that, but all things being equal, are would you say that the payroll and occupancy costs incurred over the last fiscal year are what we should be modeling going forward?
It's a tough question. I can't. I think there's one thing that we all have to be aware of. Our business in Vegas has been extremely. We have new management in place in Vegas. They were not left, the new management was not left with the best of circumstances. There were holes that we could not fill. Last year in Vegas, two new hotels came on board. They required 8,000 people in a labor market that was impossible to start out with. What covered up our struggles and helped us dramatically was this boom in an acceptance of higher prices in Vegas when we did put through price increases. My one concern is that level of sales sustainable?
There's a lot of reasons to think it is. Conventions are coming back. The T-Mobile Arena, which is right next to New York. New York, where most of our sales in Vegas, come from, is more active than ever between hockey games and concerts. There's a football team there now. There's an NBA team scheduled to come in. We think the sales should be, continue at these levels. I must say, you know, between price increases and added customer counts, our Vegas business was up 15% from the year before.
Mm-hmm.
As long as that's sustainable, I think, you know, the level of earnings that we had for the year, this year, are probably sustainable. I honestly expect New York to continue to perform well. Sequoia in Washington should perform better. I don't see any reason for Florida to do anything but continue to do its current levels of volumes. You know, there's a big hole missing in Rustic's EBITDA. That restaurant used to do $3.4 million in, you know, operating cash flow. It's down to $1.6 million annualized. You know, the $14 million number of EBITDA that we did this year, that's a big hole.
You know, $1.8 million of that is missing from Sequoia. Not Sequoia, excuse me, Rustic Inn. I think that should do hopefully better at some point, maybe not immediately. The Vegas numbers had a one-time $500,000 retirement payment for Paul Gordon, who retired as general manager. There's some, you know, that's a true one-time expense item. Anthony could speak with paying down the term loan with our bank. Maybe Anthony should speak to the balance sheet for a second.
Yeah.
We're paying down a term loan and exchanging that for a credit line for the same amount. That'll save us $400,000 in interest charges. Right now, Anthony, if I'm correct, we have about $28 million-$29 million in cash...
Yes.
in the bank. What's the debt?
$23 million.
$23 million in long-term debt. Plus $5 million there. We're in a strong position to make acquisitions. I see, you know, I actually see the $14 million number as a base, if that's an answer, as opposed to being at risk. I see that as a base. Hopefully we could get beyond that.
No, that's really helpful. Thank you. Can you just give an update on the Meadowlands?
Yeah, I'd be happy to. It's a repeat of the last update. We definitely think the Meadowlands will be the site for a casino in northern New Jersey for a variety of reasons. Number one, the racetrack already has, you know, betting going on, and that's an advantage. The sports betting at the Meadowlands is, I think, has been the largest single U.S. site for sports betting. Although there's been an encroachment with online betting in New York, we're still doing very well there. The drop-off has not been as significantly affected as we would've thought. The whole thing is permitted for environmental and other things that other sites would have to go through.
We're not in a neighborhood that we would get residential lawsuits. We think if New Jersey wants to start to get tax money from the operation of the casino, We would literally be 90 days away if it was approved from having a casino operation, literally. The racetrack was designed with that in mind. The whole theory about getting this passed by the citizens of New Jersey, because they have to change the constitution, essentially, through a referendum, would be to have New York casinos operating downstate, means Yonkers, Long Island, and perhaps even Manhattan. There are two groups vying for one of the three licenses in Manhattan.
If those licenses are issued and, or if they start building and operating, certainly Yonkers and Aqueduct could operate right away. New Jersey recognizes that, you know, that there is a flow from New Jersey to those New York casinos. We think that's the time, ideally, to get this referendum passed. That's, that's the plan. Murphy is very, the governor of New Jersey, is very favorable and inclined. He has said that to having a northern, you know, casino. The only thing we don't know is what that referendum would look like. Last time, the referendum looked, it required that the casino be operated by some company that is already licensed in New Jersey, which would be one of the Atlantic City operators.
At that time, when the first referendum, which, you know, was not gonna pass, Hard Rock did not have a casino in New Jersey. They now do. They run the old Taj Mahal. They're our partners in this venture. I think, you know, nothing negative has happened. And there's, t he positive circumstances are that, we still do a lot of sports betting on-site. The New York casinos are moving forward. I think that all plays well into our hopes of getting a casino license.
Thank you. Just finally on that, I know you've mentioned in the past that the logical conclusion would be for someone like Hard Rock to buy us out. Some people have speculated that the price they'd have to pay is almost equal to the whole market cap of Ark. Is that within the realm of possibility from your point of view?
I won't accept a number equal to the capitalization of Ark.
Mm-hmm.
I think it's worth much more.
Okay.
Look, when we when I'm not speaking out of school here. when we were looking for partners, when it looked like the first referendum was gonna come to fruition, which it did, and it was voted down because it was badly written. It sounded like the state had to put up the money, which was not true. There was no, there was no mention in the referendum of where the tax money was gonna be allocated to, whether nursing homes or education. It was just, it was just fluff. We did have a conversation with MGM about because even though Hard Rock was our 20% partner in the deal, we needed a licensed operator in Jersey to operate in the north.
MGM gave us projections that the, this thing would do $500 million a year after paying taxes and cash flow. You know, what, we own 7%, almost 8% of this thing fully diluted. There would be more dilution if we couldn't come up with our percentage of equity. Even if we own 4% of this, you know, that's $20 million of a cash flow, that you could attribute to, you know, Ark's interest. We also have an exclusive on all the food and beverage with the exception of a carve-out for a Hard Rock Cafe. That's probably a $50 million-$60 million business for us. You know, the potential economics are extraordinary. First get me the casino license.
I mean, you know, we don't have that. I don't know what, you know, I don't know what that's worth, certainly I don't think it's priced into the stock.
I appreciate that. Thank you.
As a reminder, to star one to ask a question. Our next question comes from the line of Jason Walters at Private Investor. Please proceed with your question.
Thanks. Good morning, guys. Quick question on acquisitions and capital allocation. I know, Michael, you like to purchase companies for, you know, 3 - 5x EBITDA, depending on whether you're getting the land included. You know, Ark is trading at that level or below that level. Any thoughts on share repurchases, A, and then, B, what are you seeing in terms of opportunities on the acquisition side? Thank you.
Well, thank you. I'm glad you got it right. The 3 - 5 x, depending upon whether the land comes with it or not is absolutely correct. We're constantly looking. We've seen a couple of interesting things. There are ongoing discussions, one of them further along than the other. The philosophy here would be, we would rather acquire cash flow, which would be, you know, hopefully long-term consistent cash flow, than reducing the number of shares. We think we're better off acquiring assets, as opposed to share repurchase. Another influence, which we don't even think about, but you should think about, is the already illiquidity built into, you know, our capitalization. We just don't have that many shares outstanding, floating around.
I mean, I could tell you where 60% or 65% of the float is right now, it's not leaving those hands. We just don't have enough shares outstanding. That's a bad thing because, you know, somebody that wants to buy it, you know, has to find moments like this when the stock is down and maybe there's a seller. Also it's a bad thing if you wanna sell the stock. There's, you know, a block comes up, there's not necessarily a buyer available. We just don't wanna shrink the shares anymore.
that all being said, you know, we're still much better off buying stuff at 3- 5 x, with either lease positions where we have 25 years left on a lease if it's a lease or if we own the land, it's forever. we're confident enough that we know how to run these things, that, you know, the cash flow from an acquisition should be, you know, long-lasting. we've been very lucky in the past. Make no mistake, there's, you know, I think we made smart acquisitions, but the luck involved has been that every chef and every manager of every restaurant that we've acquired, has stayed with us. It's extraordinary.
I think we're a good company to work for, but to have nobody leave and have all that expertise remain, I'm not so sure we'll be as fortunate going forward. I hope so. That's a big issue with us as well and slows us down in jumping into acquisitions. We gotta make sure that we have, you know, management in place that we have a good chance of retaining. I hope that answers your question.
Yes. Thank you.
If there are no further questions in the queue, I'd like to hand the call back to management for closing remarks.
Thank you. We're working hard here. We really are. Hopefully, you know, things continue to improve for us. We'll speak to you the next quarter. I appreciate your participation, and the questions were very good today, and gives me a chance to explain the business a little bit better. Have a good day. Happy holidays, everybody.
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.