Luby's, Inc.
Q2 2019 Earnings Call Transcript

Published: 22 Apr 2019

[Operator:]

Greetings and welcome to Luby’s Fiscal 2019 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Goodweather, Vice President, Financial Planning and Analysis. Thank you, sir. You may begin.

[Steve Goodweather:]

Thank you, and again, welcome everyone to Luby’s 2019 fiscal second quarter earnings conference call. This call is also being webcast and can be accessed through the audio link on Luby’s website lubysinc.com. Information recorded on this call speaks only as of today, April 22, 2019. Before we continue, I would like to remind you that the statements in this discussion, including statements made during the question-and-answer session regarding Luby’s future financial and operating results are forward-looking statements. Those statements include risks and uncertainties, including but not limited to, general business conditions, the impact of competition, success of operating initiatives, changes in commodity costs and supply of food and labor as well as seasonality of the Company’s business, taxes, inflation, governmental regulations and availability of credit as well as other risks and uncertainties disclosed in the Company’s periodic reports on Forms 10-K and Forms 10-Q. With that, I would like to now turn the call over to Luby’s President and CEO, Chris Pappas.

[Chris Pappas:]

Thanks, Steve. Good morning everyone and thank you all for joining us on today’s conference call. I’ll begin with an update on our turnaround progress followed by a recap of the quarter. I’ll then turn the call over to our COO, Todd Coutee followed by remarks from our CFO, Scott Gray. As I discussed with you last quarter, we're working hard on our turnaround plan for the Company. During the quarter, we made positive progress reducing costs and selling assets to better position the Company going forward. Since the beginning of the second quarter last year, we've closed 27 underperforming restaurants and through our $45 million asset sales program that began last year, we generated proceeds of $34.7 million. We also continued to make progress with our plans to refranchise many of our company-owned Fuddruckers as we transition to primarily a franchise model for this brand. We've recently converted five company-operated Fuddruckers restaurants to franchise operated restaurants. These restaurants are in San Antonio and were leased in early April to a new franchise operator with Fuddruckers experience. We continue to work on additional re-franchising opportunities outside of our home market of Houston Texas. From an operations perspective, cost management remains a primary focus throughout our organization and even after adjusting for the number of closed stores, our cost run rate came down in the second quarter. For the second quarter in a row, we've reduced our food and operating cost at a greater percentage and restaurant sales declined. Store level profit as a percentage of restaurant sales improved in the second quarter to 10.7% compared to 7.7% in the same quarter last year, due primarily to effective cost controls to reduce food and supply expense, efficient hourly labor scheduling and reductions in repairs and maintenance expense. In addition, we've reduced our corporate overhead cost. Our selling, general and administrative expenses decreased $0.2 million dollars. The quarter included $1 million in costs related to our 2019 proxy contest. If we remove this one-time proxy solicitation cost and communication cost, SG&A expenses would have decreased by $1.2 million and so just $0.2 million. As we stated on our last investor conference call, we're taking actions to seek to improve our financial results and operating performance. To help with this, Luby’s has engaged Alvarez & Marsal corporate performance improvement division, part of their global management consulting firm with significant experience with performance improvement within the restaurant industry. Alvarez & Marcel is tasked with seeking to identify some opportunities to help reduce our SG&A costs and improve our profit and growth. Turning now to sales, we continued to reposition our brands to help improve sales and increase store-level profit margins to drive better financial results in 2019 and beyond. Despite same-store sales results for the quarter below our expectations for the full year, they did improve sequentially at both our Luby's Cafeteria and Fuddruckers. As we look at our Culinary contract service business, this business remained strong and continues to grow. Revenues in this segment increased by 28% to 7.5 million, up from $5.9 million with 33 operating locations during the second quarter. New locations contributed approximately $1.4 million in revenue and locations continually operated over the prior year increased revenue of approximately $0.3 million. Our profit margin for this business increased to 11% above our long-term target of 8% to 10%. As we move forward, I would like to reiterate my comments from last quarter call, when I stated that the business of operating mature brands in a highly competitive market is a hard way. But we believe we know and we have the experienced and dedicated people to operate our company to the highest standards and involve the business to return to profitability and ultimately growth. The past two quarters represent substantial growth progress in turning the Company around as we work hard to enhance all our shareholders value. I would now like to turn the call over to Todd Coutee for a few comments. Todd?

[Todd Coutee:]

Thank you, Chris. I am pleased to join the call today. As Chris mentioned, we continue to realign our organization by getting the right people in right positions, while providing them with tools and coaching they need to be successful. Our teams also hard at work on several initiatives to enhance sales at each brand. To that end we're offering new everyday value choices. We're also focusing on the dinner meal part and specifically how well the convenience factor plays an important role. We're also pleased to announce that we're re-introducing breakfast as an option at Luby's which is a natural extension of our cafeterias. Within our Luby's cafeteria business we continue to provide our guests with convenient great tasting home-style meals at an excellent value in a comfortable environment. We have an intense focus on product execution and menu innovation in order to keep our Texas comfort food up on trends. Luby's Culinary services, our contract food service brand continues to be an amenity to healthcare, senior living communities and corporate dining facilities, along with stadium venues and sales through retail grocery outlets. The Luby's brand is a huge asset to growing this business, new account opportunities and known appreciate the quality and variety of our food, our brand represents. Fiscal 2019 year-to-date we’ve added four new facilities and that’s on top of a net increase of four locations last year. In fiscal 2018 -- last year in fiscal 2018, we custom tailor solutions that meet the unique requirement and preferences of our very clients and that is both the appeal to our client and our competitive advantage in this business segment. Fuddruckers remains a strong brand and while same store sales were down in the second quarter, they improved significantly from the first quarter. We believe this progress will continue as we execute our internal action plans to drive better results. Lastly from our marketing perspective, we continue to utilize various forms of digital media, to keep our marketing targeted and measurable. Our campaign includes video content with authentic testimonials from our guest, early team members and restaurant managers. Our intention is to clearly differentiate our brands from competitors by sharing the emotional connection so many people have with our brands. We believe we not only offer great value for our guest, but also a certain familiarity that our guests cherish. I’m excited about the good work that we’re seeing throughout our operations teams. I’m thankful to work alongside so many dedicated collogues as we all focus on the goal of delighting our guests every day, which we know will result in positive outcomes for our company. With that I would like to turn the call over to our CFO, Scott Gray. Scott?

[Scott Gray:]

Thank you, Todd. I’ll quickly touch on second quarter financial results. Adjusted EBITDA increased 2.9 million to a positive 0.5 million, compared to a negative 2.4 million in the second quarter last year. The increase was primarily the result of 300 basis points improvement and store level profit despite a decline in same-store sales in our restaurant segment and increases in culinary contract service segment profit as well as lower SG&A expenses. As Chris noted, our selling and general administrative cost decreased by $1.2 million when you strip out the one-time proxy solicitation cost. The marketing and advertising component of our SG&A was $800,000 or $0.8 million in the quarter, and represents just about 1% of our total sales. We are continuing to evaluate our marketing spend as we go forward. While the second quarter results are still not where we want them to be, relative to our trend they do represent sequential improvement by the team, both from a sales and expense perspective. Same-store sales decreased 3.3 in the second quarter, but showed improvement compared our first quarter which was a decline of 5.5%. As Chris mentioned, our operating cost as a percentage of restaurant sales also improved due to improved cost controls. Noteworthy was a decrease restaurant level cost in food and supplies as well as significantly reduced repairs and maintenance expenses. Payroll and related costs also benefited from lower accrued workers comp expense in the quarter. Turning to the balance sheet. We ended the second quarter with net debt, that’s to say, debt less our cash on the balance sheet of $29.6 million, a decrease from $35.8 million at the end of fiscal 2018. During the second quarter, our capital expenditures decreased to $0.7 million, compared with $3.7 million in the second quarter last year, which did include a rebuilding of a store that was damaged by the hurricane. While we previously estimated to spend up to $8 million in maintenance CapEx in fiscal 2019, we now believe we're able to keep CapEx spend under $6 million, but that's before adding any additional CapEx related to brand re-imaging or remodeling capital currently under our evaluation. At the end of the second quarter, we had $3.9 million in available cash and not on the balance sheet we also from our relationship with MSD Capital, we had undrawn $10 million revolver as well as an undrawn $10 million basket of term loans. We had $10.8 million in restricted cash and then $44 million in the term loan balance from -- with a fully prepaid first year amortization and that’s a no current portion of debt on the balance sheet. This is the amount outstanding on the 12/14 closing debt term loan draw of $60 million. And then we also had $114.8 million in total shareholders’ equity. Sales trends after our second quarter ended March 13th have continued to show improvement. Due to the positive year-over-year EBITDA results this quarter, we are reaffirming our expectations for fiscal 2019 adjusted EBITDA of $5 million on the low end. We currently estimate an adjusted EBITDA of $7 million for fiscal 2019 and that includes $1.7 million in one-time expenses related to the proxy contest. With that, I'd like to turn the call back over to the operator. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Please ask one question and one follow up question and then requeue for additional questions. One moment please while we poll for questions. Thank you. Mr. Pappas it feels we have no further questions at this time. I would like to turn the call back over to you for closing comments.

[Chris Pappas:]

With that -- thank you operator. At Luby's we believe we have this right team and leadership in place to continue to make progress this next quarter on our plans to improve our results and we look forward to speaking with you again on the next quarter. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines and have a wonderful day.