Luby's, Inc.
Q1 2018 Earnings Call Transcript

Published: 29 Jan 2018

[Operator:]

Greetings, and welcome to the Luby's Fiscal 2018 First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Goodweather, VP Finance and Investor Relations.

[Steve Goodweather:]

Thank you. And again, welcome, everyone, to Luby's 2018 Fiscal First 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, January 29, 2018. Before we continue, I'd 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, as well as plans for expansion of the company's business, including the expected financial performance of the company's prototype restaurants and future openings 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 risk and uncertainties disclosed in the company's periodic reports on Forms 10-K and Forms 10-Q. With that, I would now like to 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. With me today are Scott Gray, our Chief Financial Officer; and Peter Tripoli, our Chief Operating Officer. In the first quarter we were encouraged by the process of the operational and guest initiatives that we'd began implementing last year. These efforts contributed to same-store sales growth as well as improved cost controls leading to growth in our EBITDA by over $1 million. First quarter companywide same-store sales were up 0.8% as positive comp was primarily driven by same-store sales growth at our two primary brands; Luby's Cafeteria which was up 1.5% and Fuddruckers which was up 0.6%. We are pleased with these results in what continues to be a very competitive marketplace while the economy is certainly showing signs of improvement; the restaurant industry has not yet participated in this market uptick. Several primary factors separate the restaurant industry including the fact that nearly all of the major restaurant markets in the country over the last several years have been overbuilt; this trend has caused the market to grow beyond organic growth and has saturated many communities with too many restaurants each. Given this backdrop, restaurant companies are investing in social media, marketing campaign tools, work delivery and adapting technology in effort to drive traffic and sales, and we're doing those things as well. However, the fundamentals of growing sales and profitability in our sectors have not changed; our primary focus has and continues to be providing an excellent guest experience at our restaurant through superior service and unmatched food quality and variety. We are focused on providing our best inside the four walls at our restaurants everyday through operational and service initiatives to provide the best guest experience possible. The freshness of our offerings has always been a hallmark of our brands and today we continue to enhance freshness by using more locally sourced items, expanding flavor enhancements through an extended range of ingredients and new menu items. To support this effort we've increased the number of in-house chefs on our culinary development team adding breadth and depth to this vital area of our business. Additionally, we believe that we are better communicating the freshness message to our guest as a core competitive advantage. Lastly, we're repositioning and elevating certain operational leaders to give us more frequent oversight in development of general managers and area leaders. Our restaurant teams are energized by these efforts and we believe they will contribute to our success. Our team has a deep experience across all areas of food service and we've navigated through many industry ups and downs over the last several decades, we believe we have the right expertise and experience to build on the first quarter same-store sales growth and progress the company towards profitability. We remain optimistic that running two premier brands that we believe are unique in their offerings, customer loyalty and overall value will lead to growth over the long-term. Switching to our Culinary Contract Service Segment; revenue grew significantly in the first quarter and remains on-track to show substantial growth in the year 2018. We remain optimistic in our ability to grow our culinary contract service segment through our unique value proposition to the marketplace of experienced operators, superior food offerings, excellent service and outstanding brand awareness for quality. I will now turn the call over to our CFO, Scott Gray, to review key financial metrics from the first quarter. Scott?

[Scott Gray:]

Thanks, Chris. Before I get started, please note that we posted our investor presentation on our website at lubysinc.com under the Investor Relations section, and under the Events section. The presentation contains some additional information that we believe will be helpful to our investors. Beginning with our company operated restaurants business segment; we're pleased to have sales moving in a positive direction reversing negative sales trends that we've experienced in the prior year fiscal 2017. With regards to first quarter sales and I'll go through the brands in the segment. Luby's Cafeteria's same-store sales increased 1.5% compared to last year; this increase was the result of a 4.8% increase in average spend per guest due to price increases and minimal discounting, partially offset by 3.3% decline in guest traffic. Luby's Cafeteria's average weekly sales per unit volumes were $51,000 in the quarter. Fuddruckers restaurant same-store sales increased 0.6% in the first quarter. The increase was the result of 4.5% increase in average spend per guest due to modest market price increase, partially offset by 3.9% decrease in guest traffic. Fuddruckers average weekly sales per unit were $30,000 per week in the quarter. Our combo location same-store sales which represents six properties or 12 restaurants, let's say those combos include a Luby's Cafeteria and a Fuddruckers restaurant; increased 1.3% in the first quarter. Combo average weekly sales per week were $70,000 in the quarter. Cheeseburger in Paradise same-store sales which are full service concept decreased 10.5% in the first quarter as consistent with others in the casual dining segment of the industry today. Cheeseburger in Paradise sales averaged $31,000 per week in the quarter. Store level profit defined as restaurant sales plus vending revenue less cost of food, payroll related cost and other operating expenses and occupancy cost was 10.6% of restaurant sales in the first quarter compared to 11.7% last year as a percentage of restaurant sales. There were few items in the first quarter this year and last year that impacted our store level profit year-over-year performance comparison; specifically in the first quarter 2018 we incurred approximately $0.3 million in pretax net uninsured losses related to hurricane Harvey and it's aftermath, this is an amount above what we've recovered from funded insurance proceeds in the quarter after considering insurance deductibles. And then last year in the first quarter our payroll related costs have been benefited from a $0.5 million reduction in our workers compensation reserves. When we're moving these items from the store level profit comparison for this quarter that gets our fiscal 2018 first quarter store level profit to 10.9% of restaurant sales compared to 11.2% last year. The 0.3% decline was partially attributable to higher packaging and catering supplies due to increased Thanksgiving sales and as well as increased third-party delivery fees as more of our guests utilize our delivery options. Also to know, we realized an approximate 4.5% year-over-year increase in sales for the week of Thanksgiving. Thanksgiving sales represented a 6% of the total cafeteria sales in the quarter. In our culinary contract services business segment revenues increased to $7.5 million compared to $4.3 million in the first quarter of prior year. Culinary EBITDA was up $1.2 million in the first quarter which is over 40% of our total company EBITDA, margins in this business segment are now consistently well above our long standing target of 7% to 10%. Turning to our third business segment, Fuddruckers franchise business segment; revenues was up slightly compared to last year due to openings and increased royalties. Our franchise segment profit was up $0.1 million due to a decline in the cost of franchise operations in the quarter. Adjusted EBITDA in the quarter was $2.6 million, up $1.1 million in the first quarter compared to $1.5 million last year. A reduction in SG&A of $2.2 million and an increase in culinary EBITDA of $0.7 million were partially offset by declines in our overall company operated restaurant store level profit. The decline in SG&A included a $0.9 million reduction in marketing and advertising spending, part of this reduction was a redirection of marketing spend away from more costs television advertising to more economical and targeted digital media advertising. However, some of this reduction is also simply a change in the timing of our marketing spend throughout the year so I would caution against taking this as our new run rate for marketing spend. SG&A expenses have decreased in the past four consecutive quarters. Now moving on to the balance sheet; we ended the first quarter with the debt balance outstanding of $31.1 million, up slightly $100,000 compared to the fiscal year end 2017. Q1 capital expenditures were $4.3 million, which compares to $5 million in the first quarter last year. We expect our capital expenditures to be under $12 million in this fiscal year 2018. And with that, I'd like to turn the call over to Peter Tripoli, our Chief Operating Officer, for an update on operation, strategy and marketing.

[Peter Tripoli:]

Thank you, Scott and Chris. I will outline the strategies and actions we're taking to improve our company and speak to our brands. As Chris stated, superior store level operational execution remains our sharpest focus. Operationally, we continue to address this through superior systems, procedures, supervision and direction, oversight as well as follow-up and accountability. We continue to have high expectations for our team members and for our management. Through superior store level operational execution, as well as our tactics and plan, we expect to achieve more profitable sales initiatives. Everything we do operationally including menu engineering, restaurant appearances, technology infrastructure, purchasing and marketing is geared towards delighting our guests. This means every aspect of operations continues to be evaluated and challenged for both, efficiency and how it impacts and elevates the guest experience. And all this starts with our in-restaurant team members; our restaurant management, our front-line restaurant associates, they are the face of our business. We continue to invest in them and provide them with the tools to best serve our guests. Superior store level execution, superior products and superior facilities allow us to increase the visit frequency of our guests, attract new guests in our restaurants, keep guests happy and loyal, create new revenue streams and increase our cheque averages. We can meet each of our guest needs better once we understand them better. We completed our engagement with the top loyalty group to assist us in crafting the next phase of our loyalty and recognition platform. We'll balance it to attempt to maximize the impact between informing, promoting, incenting and rewarding offerings that are unique to each customer and delivered across channels. We are now working to activate our proposed loyalty program through our technology infrastructure and our units, next we will test and refine. And then finally, we hope to roll it out later this year, brand by brand as appropriate. We'll use the insides to improve our tactics and to improve customer experience results going forward. Fielding our brand equity means refining each of our brand strategies, brand stories, what each stands for, their point of view and identity and how they show up in the world, as well as the operational implications for each. Next, we continue to elevate existing culinary as well as new product development innovation at our company, we intend to increase our appeal and relevant differentiation and of course create new revenue streams. Our focus is on taste and flavor, training and execution at all of our units ultimately. This process is recipe driven, we continue to develop new contemporary options that feels today's diner emphasizing freshness, quality, taste and relevance. We review the best ingredients, preparation, techniques and recipe updates. Finally, we continue to invest in upgrading our facilities, our kitchens, dining rooms, restrooms, and exteriors; our focus however isn't on big flashy remodels at this time but instead focused on smaller and more targeted upgrades that still move us forward; this evaluation is done on a store-by-store basis. From a brand standpoint operationally at Luby's we launched several campaign to reinforce brand awareness for Thanksgiving and Christmas holidays. We emphasized the online ordering capability for holiday meal packages, our ads were placed on social platform such as Facebook and Instagram, as well as mobile aps website and in Google search results. This approach along with great execution led to 4.5% sales increase in the week of Thanksgiving. At our Culinary Contract Services segment, we grew our revenue in the fourth quarter and are on a path to show meaningful growth in 2018. We have several new accounts coming online as well, and we are pleased with the trajectory of this segment. From a packaged good standpoint, our partnership with ATV, our Texas born retailers, selling our famous macaroni and cheese and fried fish continues to exceed expectations; this has been a great opportunity to provide additional awareness of our Luby's brand in Texas. We are hard at work trying to grow that relationship with new products and new product offerings. At Fuddruckers franchise business segment, we continue to work very closely with our franchise leadership council to improve our brand together and to align ourselves better as a brand; this includes culinary development, menu optimization, guest experience, looking feel decor, distribution and product packaging. As we focused on improved restaurant operations at our company and franchise units, we continue to emphasize adherence to our brand standards. In addition, we're completing a marketing checklist on each restaurant to ensure complete participation in our sales building programs. This checklist covers in-store marketing, digital team interaction with guests along with other sales building efforts. Additionally, new franchise development is a crucial component to our plan. Our franchise development team is working at large list of perspective candidates; these efforts will make our model more competitive. To summarize, by focusing on the right things we expect to continue to see improvements. I'm pleased with the progress that our team is achieving to reverse year-over-year sales and cash flow trends and to position our company for success moving forward. Thank you. I'll pass it back to Chris now. [Operator Instructions] Okay.

[Chris Pappas:]

Thank you, operator. Thank you all for joining us today and we look forward to speaking with you again next quarter.

[Operator:]

Thank you, ladies and gentlemen, for your participation. This does conclude today's conference. You may disconnect your lines and have a wonderful day.