Luby's, Inc.
Q3 2018 Earnings Call Transcript

Published: 16 Jul 2018

[Operator:]

Greetings and welcome to Luby's fiscal 2018 third 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 of Financial Planning and Investor Relations. Thank you. You may begin.

[Steve Goodweather:]

Thank you. And again, welcome, everyone, to Luby's 2018 fiscal third-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 included on the call speaks only as of today, July 16, 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 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 said, I'd like to now 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, and Peter Tropoli, our Chief Operating Officer. In the third quarter, the bright spots were positive same-store sales at Luby's Cafeteria, our largest restaurant brand, and continued growth in our Culinary Contract Services business. Unfortunately, these two positive trends were not enough to enhance our overall financial performance in the quarter. While we've been intensely focused on delivering superior service, excellent food quality and variety of compelling values, our cost increases have exceeded our ability to grow overall restaurant sales quickly enough through menu pricing and increased guest traffic. As we've discussed before, the current competitive restaurant environment is making it difficult for our brand and the mature brands of many others to gain significant traction. We've been faced with the environment for quite some time, which has been a large drag on our financial results and our company valuation. The challenge of rising costs, flattish-to-down sales, and a sustained debt balance are restricting the company's overall financial performance. However, the Luby's and Fuddruckers brands are highly regarded in the marketplace. We believe these mature brands can continue to thrive in today's marketplace and grow over time. But within our current restaurant portfolio, there are number of units not achieving the necessary financial success due to any number of factors – market changes, residential and population shifts, overbuilt areas, et cetera. We track our stores very closely and evaluate their current performance and historical patterns in conjunction with their specific market-related factors to determine the best future outcome of each location. We own many of our restaurant properties. And when we close stores at these locations, we recover the value of the property through a sales transaction. In this way, we have a distinct advantage over other mature brands that lease their properties. Last quarter, we announced that we began executing on our plan to sell 14 properties we own and use an estimated $25 million proceeds to pay down debt. We're committed to these sales, as well as we've added an additional $20 million in assets sales to be sold. As of today, we've completed the sale of one location and have two additional properties under contract with offers on a few more sites coming. Through the sale of units to pay down debt and continued focus on superior store level execution for service, food and facilities, we believe we can enhance the company's financial performance. As we execute on this expanded asset sales program, we're also pursuing a refinancing of our debt under a new credit facility. We've engaged the firm of Cowen to assist in this refinancing effort. We believe that positions our company to have a lower debt, improve same-store sales throughout our restaurant portfolio and a lower overall cost structure will enhance our returns. Our senior team and company leaders have decades of restaurant operating experience and have managed through previous challenges. The overall current restaurant environment is oversaturated in markets and we have seen this cycle before. Currently, we're experiencing the restaurant industry going through a streamlining process with the closure of restaurants in many markets. We are certainly not immune to this as we've just mentioned and we're going through the same process. Once we've completed these actions related to reducing and refinancing our debt and streamlining our operations, the company will be positioned to improve our financial results. I'd now like to turn the call over to our CFO, Scott Gray, for an update on our financing and etc. Scott?

[Scott Gray:]

Thanks, Chris. Despite the growth in same-store sales that Chris mentioned at our Luby's Cafeteria brand, our overall same-store sales were down slightly, 0.9%. Restaurant sales from our largest business segment must improve meaningfully and significantly before we can return the company to profitability. In the quarter, we continued to experience cost inflation in each of our major cost categories – food, labor and other operating expenses. With our operating expense line, we've incurred repairs and maintenance expenses at levels above prior year. Traffic, along with price increases, must occur in order to meaningfully improve – having a meaningful improvement in our results. As a result of the third quarter's financial performance, we were not able to achieve the minimum EBITDA requirement or our maximum lease adjusted leverage ratio per the second amendment to our 2016 credit agreement. Our banking group granted us a waiver from our covenant measurements effective May 9, 2018 until August 10, 2018. This waiver and consent was granted in order for us to have time to work towards an amendment, which will include certain milestones as we proceed with our asset sales plan and refinancing of our debt under a new credit facility. To assist us in accelerating the refranchising effort, as we've disclosed, we've engaged the investment advisory firm of Cowen. We have identified additional owned properties to sell, as Chris mentioned, which will be used to reduce our outstanding debt to near zero. The debt reduction and refinancing combined will – our profitability will be improved. We'll start to show improvement beginning in the second quarter of next fiscal year and will serve as the baseline for our company going forward. And with that, I'd like to turn the call back over to Peter Tropoli, our Chief Financial Officer.

[Peter Tropoli:]

We're immediately addressing the challenges and causes that contributed to this quarter's financial results. Our operating teams are fully engaged every day as we strive to deliver on our promise of delighting our guests with regards to food, service and atmosphere, as well as delivering on our business goals. Store-level execution remains our top focus and the key actions that create loyalty to our brands. These efforts will be the way that we're going to achieve our profit goals again. 2.4% same-store sales growth in the quarter at Luby's Cafeteria brand and the higher average spend per guest at both Cafeteria and Fuddruckers brand is encouraging, but we have much work left to accomplish. We're also pleased with the results from our Culinary Contract Services segment as well. As we streamline by closing underperforming locations, we will be able to concentrate all of our energies on rebuilding and elevating operations and guest experiences at the remaining stores for the future. We believe that by refocusing on the right things, we're going to see the necessary improvements. I would like to thank our team members and management for their consistent effort and dedication. Thank you. I'll pass it back to Chris now.

[Christopher Pappas:]

Thank you, Peter. Operator, we'll now open the line for questions. Great, thank you. [Operator Instructions]. Thank you. I'd like to turn the floor back over to Chris Pappas for any closing comments.

[Christopher Pappas:]

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

[Operator:]

Great, thank you. This does conclude today's conference call. You may disconnect your lines at this time. Thank you again for your participation.