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Ark Restaurants Q3



August 15, 2012 – Comments (0) | RELATED TICKERS: ARKR

Board: Value Hounds

Author: TommyRumblestrip

Ark Restaurants reported their 3Q numbers on Friday and had their conference call earlier today. My notes from the call are below.

The numbers look good – overall SSS up 4%. Q3 revenues were flat though EBITDA increased to $5,352,000 from $3,997,000. Diluted EPS was .89 vs. .73 for the quarter.

For 9 months, revenue is again up just slightly but EBITA is $8,907,000, up from $5,081,000. Diluted EPS is $1.41 vs. .45. They seem to be gaining traction. Full results here.

The big downer from the call is that their new restaurant Clyde’s is struggling. More in my notes:

3Q Conference Call Notes – these were jotted down quickly and might be slightly wrong:

- Good quarter, driven by sales in DC which have been building consistently over the past 3-4 quarters. NY remains up and stable, AC up significantly, CT flat, Fire in Boston. W/o fire Boston would be up slightly. Las Vegas – good improvement at Planet Hollywood (new owners), NY, NY up slightly, Venetian down slightly.

- NY & Boston are exceptional, NY less price sensitive than last few years as shown by strong corporate events - generally less negotiating on price. Individual restaurants all doing very well. Early quarters this year all driven by good weather, but this quarter's improvement was based upon similar weather as last year.

- Atlantic City is seeing more business, though they can’t explain why. Up 25% though hotel is having problems (bankruptcy). They expect it will do better in the future when the property changes to Margaritaville, won’t close during renovations

- CT – treading water along with the casino in general

- Boston – fire is big issue, Durbin Park has new owner, they expect to do better

- Las Vegas was somewhat disappointing – up 2.7%. There may be some slowing – if there is a double-dip, it’s only showing in LV.

- All in all a good quarter

1) Insurance claim for flood, build-out allowance for Clyde’s: 4 open items – several hundred K outstanding from flood, 2) overpayment of 500K in taxes, 3) 100-200K from Boston fire. Insurance claims take forever. Pretty confident in all these numbers. 4) Recently received 1.8m for Clydes, still owed 300K. Another few months. Currently have $7.5m in cash, with these items, total of roughly $8.5 in cash

2) Clydes – disappointment – good reviews, good food, good participation, but not performing very well. Think there is a problem in that people think of it as a sports bar – they intended Clyde's to be a fine restaurant. Bar is busy, but dining room ignored. Trying to fix this. Got unlucky with open – wanted to open with basketball season, but subcontractors delayed by 4 months, which likely hurt. They think the fall will be better. Summer has been terrible. Trying to be stingy with costs, they need to change things.

3) Basketball City – opened June. Ark was interested in the catering prospects. Facility will be used for league games but also as event space with ample parking (key). Hence the catering. Agreement is for exclusive catering for all events except those brought in from other caterers (they get % at that point). As part of this deal, they have to operate a restaurant – the burger bar. They expect modest sales, maybe breakeven or slight profit. The restaurant is not open. They’ve done some minor events there – they expect it to pick up and be very attractive. Restaurant will open in January, but catering should bring nice numbers come the 1st Q of next year.

My thoughts:
In Q2 call, they said they expected to build cash back up to $10m by the end of the year. That looks on target.

ARK’s EBITDA numbers are very strong, getting stronger. If you compare the last few years, this is already their strongest year since 2008 with one more quarter to go:
FY 2012 (3 quarters only) – $8.76m
FY 2011 – $8.077m
FY 2010 - $8.081m
FY 2009 - $8.099m
FY 2008 - $13.607m
FY 2007 - $15.270m
FY 2006 - $13.607m

I’m not worried about Clyde’s, though I am confused by their statement that it’s not a sports bar. In their public documents, ARK mentions that each restaurant is unique and it takes a while to work out their identity and success patterns. This seems to be the case here. The reviews for Clyde’s seem to be very positive. It is a bummer that they missed out on this last basketball season, as Jeremy Lin single-handedly lifted MSG’s stock and probably would have helped this restaurant.

Though I don’t play basketball as much as I used to, Basketball City has a strong buzz already. I like the frank discussion on the catering prospects.

Looking at my notes from previous quarters, it seems like there may still be one or two new restaurants in New York on tap. If they’ve changed plans, I haven’t heard any news. They had talked about another museum opening, which someone on the yahoo board said would be the Museum of African Art. This yahoo poster is actually quite informed, and writes some very good recaps of each call. I think he may have been the person who asked questions on this call.

I just looked up the NY African Art Museum – it’s slated to open at 110th and 5th, though plans are delayed due to lack of funding. This is “Museum Mile,” so I suspect it would a strong location though it has to be years away.

Management has also referenced new locations along the Williamsburg, Brooklyn waterfront and in Central Park. I’ve heard nothing on either of these, though the Brooklyn waterfront seems to me to be a wonderful location. Since ARK is so small, two new strong restaurants could really boost earnings.

There was no mention of the dividend, though in the past they say it's stable.

I’ve increased my position in ARK over the past month, so I’m glad to see strong numbers (I’ll even take today’s 5% gain). As the EBITDA totals above shows, it looks to me like business continues to get stronger. It may take a true turnaround in Las Vegas to really push the stock forward, but I think these strong numbers will at least keep the dividend sustainable. Hopefully they can turn Clyde’s into a positive and Basketball City will impact earnings as expected.

I’d love to hear any other thoughts. –Tom W. (formerly Eagles22)

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