Luby's, Inc.
Q2 2018 Earnings Call Transcript

Published: 23 Apr 2018

[Operator:]

Greetings, and welcome to the Luby's Fiscal 2018 Second Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question 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 of Financial Planning and Investor Relations. Please go ahead.

[Steve Goodweather:]

Thank you. And again, welcome everyone to Luby's 2018 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 in this call speaks only as of today, April 23, 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 in 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 risks 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?

[Christopher 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; Peter Tripoli, our Chief Operating Officer. The second quarter was challenging and we are not satisfied with our performance. Total same-store sales declined 3.7%, compared to last year. The sales decline was due to less guest traffic as we moved away from certain discounting and promotional offers. While transitioning to this approach of less discounting, it had the intended effect of increasing our average spend per guest. The offsetting decrease in guest traffic resulted in a net decrease of same-store sales. We believe this approach did not generate the results we were seeking. So beginning this quarter, we embarked on our marketing and promotional plans focused on encouraging guest frequency by delivering a compelling value offering that are better balanced with a limited and targeted pricing and discounting level. This design of plan is intended to improve our profit margin going forward. In short, a year ago, we were discounting in response to an overall retail industry downturn, but then, this year, we were missing the mark by not offering sufficient incentives to an important segment of our frequent of guests that is most motivated by special offers. We now believe we are rectifying this by striking a better balanced plan with regard to discounting and promotional offers. The fundamentals of growing sales and profitability in our restaurants have not changed; our primary focus has and continues to be on providing excellent guest experience. We realize that offering better insight to four walls at our restaurants every day is a primary driver to enhancing our performance. We believe we have the right team in place and the right offerings to do that. In our Culinary Contract Service business, we opened three new locations and sales increased $3 million compared to the second quarter last year. We remain optimistic in our ability to grow our Culinary Contract Services segment through our unique value proposition to the marketplace of experienced operators, superior food offerings, excellent service and outstanding brand awareness for the Luby brand especially. Heading into the second half of our fiscal year, our team is dedicated and focused on enhancing our guest experience. To support this we are investing in the necessary resources, in our training programs and coaching at all levels of our restaurant management and operations. We know very well that better execution in our restaurants leads to better financial results. I’ll now turn the call over to our CFO, Scott Gray to review the financial metrics from the second quarter. Scott?

[Scott Gray:]

Thanks, Chris. Before discussing the quarter’s financial results, I will discuss our amended credit agreement and a related limited asset sales program. In conjunction with our banking partners and in light of our recent financial performance, we have amended our 2016 credit agreement. This is the second amendment of this agreement. The amended credit agreement permits higher leverage in the near-term, but also shortens the maturity to May of 2019. The amended agreement includes a higher interest rate and other conditions that are outlined in our 10-Q which we will file later today. We plan to lower the leverage on the company and we have identified 14 own properties as part of the limited asset sales plan to accelerate repayment of our outstanding term loan that totals $25.2 million as of today. Five of these properties were already reflected on our balance as discontinued operations as well as property held for sale and the other nine are not expected to generate an appropriate return to warrant their continued operation over the long-term. This asset sale plan which is expected to occur over the next 18 months is in conjunction with other operational changes designed to lower the outstanding debt and improve the company’s financial condition as we pursue a long-term credit facility. Beginning with our Company-Operated Restaurant business segment, restaurant sales in the second quarter decreased 8.3%. This decline includes roughly a 4.6% decrease due to a net reduction in operating restaurants and a 3.7% decline in same-store sales. With regards to the second quarter sales, Luby’s Cafeteria’s same-store sales decreased 1.8%, compared to the second quarter last year. The decrease was a result of an 8.6% decline in guest traffic partially offset by a 7.5% increase in average spend per guest, primarily due to a price increase and reduced discounting offers. Luby’s Cafeteria’s average weekly sales per unit was 48,000 in the quarter. Again with 90% of our restaurant segment profit in the quarter generated by the Cafeteria brand it remains our biggest opportunity for improving company profitability as we work on growing sales and improving margins. Fuddruckers restaurant same-store sales decreased 6.4% in the second quarter. The decrease was a result of 11.8% decline in guest traffic offset by – partially by a 6.0% increase in average spend per guest. Fuddruckers average weekly sales per unit was 30,000 in the quarter. Combo location same-store sales representing six combo locations decreased 5.4% in the second quarter. Combo sales per unit averaged 65,000 per week in the second quarter. All of my quotes on the average volume is per week per location of brand – per brand on average. Cheeseburger in Paradise representing seven Cheeseburger in Paradise locations decreased 13.9% in the second quarter. Cheeseburger in Paradise average weekly sales was 29,000 per week in the quarter. We closed one Cheeseburger in Paradise location in Maryland in fiscal 2018. Overall for the company, restaurant business segment’s store level profit which we define as restaurant sales, plus vending revenue, less cost of food, payroll and related costs and other operating expenses, and occupancy costs was 7.7% of restaurant sales in the second quarter which compare to 12.6% of restaurant sales, during the second quarter last year. The decline in margin for the second quarter was driven primarily by the declines in same-store sales, combined with increased investment in hourly labor, restaurant supplies, repairs and maintenance and slightly higher food cost. In addition, to the pullback in menu item discounting contributed to the same-store sales a decline, there were a couple of other smaller factors that impacted about 0.3% of the same-store sales metric. This includes a reduction in the catering orders as we placed focus on energy on our restaurants teams executing on the basics. We were also adversely impacted by a disruption in our point-of-sale system functioning, which impacted about 10% of our stores as well as the volume of mobile ordering through third-party channels. On the cost side, we made additional investments in hourly labor in the form of training programs and efforts to maintain store appearances, as well as increased investment in research and development activities in certain locations. We also realized an increase in restaurant supplies and repairs and maintenance as part of a program to refresh our stores in lieu of completing full remodels in the current fiscal year. Moving on to our other segments, in our Culinary Contract Services business segment, revenues increased to $6.3 million with 24 operating locations at the end of the quarter compared to $3.3 million with 23 locations at the end of the second quarter last year. We ended the quarter with a segment profit of 9.5% of Culinary Contract Service sales. Turning to our Fuddruckers Franchise business segment, revenues decreased by $418,000, compared to the second quarter last year, due primarily to the comparison against a year ago second quarter when we realized approximately $400,000 in fee income related to franchise development agreements and franchise store openings. Our adjusted EBITDA for the quarter was a negative $2.1 million, a decrease of $5.4 million from the positive EBITDA of $3.3 million in the second quarter of last year. The decrease in EBITDA was primarily the result of a $4.5 million reduction in store level profit due to lower sales with higher food and labor cost. Other impacts to EBITDA included higher one-time outside professional fees related to the IT disruption, as well as cost related to the reopening of a strong performing Fuddruckers location in Houston market that was damaged by Hurricane Harvey. As of the second quarter ended fiscal 2018, our trailing adjusted EBITDA after add-backs per our credit agreement as defined was $11.5 million, compared to $16.9 million on a same basis in the prior year. Moving on to the balance sheet, we ended the second quarter with a long-term debt balance outstanding of $38.2 million, up from $31 million from yearend. During the second quarter, our capital expenditures were $3.7 million compared to $3 million in the second quarter last year. We expect capital expenditures to be approximately $14 million in fiscal 2018. And with that, I’d like to turn the call over to Peter Tripoli, our Chief Operating Officer for an update on operations and marketing. Peter?

[Peter Tripoli:]

Thank you, Scott. My comments will briefly address what we are doing to improve operating results in our restaurants going forward. We are actively reviewing and addressing the challenges and obstacles that contributed to our negative results in the past quarter, so that we can quickly better position ourselves moving forward. We must do an even better job of delivering our promise to our guest with regard to food, service, and ambience within the four walls of our restaurants. We must more effectively market our brands to and share our story with new guests. Superior store level execution allows us to increase the visit frequency of our guests, to attract new guests in our restaurants, keep guests happy and loyal, create new revenue streams and competitively increase our check averages. We have increased our investment in store level oversight. Our area directors, area leaders and quality assurance professionals are crucial to coaching and influencing our teams and holding everyone accountable to accomplish our organizational strategies. We have also increased our investment in training tools. We are ensuring that we properly invest in training and retraining every team member, so that they may take care of our guests’ needs. Elevating our existing products from a culinary standpoint as well as to spark new product development innovation at our company, we believe will make us more competitive as well. We added two executive chefs to our team and are very active in this area. We are completing reviewing and updating all of our existing recipes and products in order to make improvements in taste, flavor, and preparation. We are also updating our menus at Luby’s and Fuddruckers as well both from the standpoint of pricing, bundling or unbundling and content. On the marketing front, we still plan to test and begin integrating a new digital app and loyalty platform this summer to supplement our existing store level efforts to better engage our guests and increase frequency and brand awareness. In the case of Fuddruckers, this will replace our existing app. In the case of Luby’s it will represent a debut. For both, guests will be able to order ahead for dine in or to go and we will be able offer uniquely tailored benefits to them, to speak to them more directly and personally. Along with operational improvements within our four walls, we believe our new loyalty platform and app will help us build guest traffic and satisfaction. At our Culinary Contract Services segment, we are testing a website to allow guests to order online as well. We believe that by focusing on delighting our guests with superior operational execution, elevating existing products through culinary excellence and building loyalty with our guests, we are going to see improvements. Thank you. I’ll pass it back it back to Chris now.

[Christopher Pappas:]

Thank you, Peter. Operator, we can now open the line up for questions.

[Christopher Pappas:]

This last quarter has been a active quarter and a tough quarter for us and we look forward to improving our results going forward. And with that, we look forward to speaking with you again next quarter. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may now disconnect your lines at this time and have a wonderful day.