Luby's, Inc.
Q1 2017 Earnings Call Transcript

Published: 26 Jan 2017

[Operator:]

Greetings and welcome to Luby's Fiscal 2017 First 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's now my pleasure to introduce your host, Steve Goodweather, Vice President, Financial Planning and Investor Relations. Mr. Goodweather, you may now begin.

[Steve Goodweather:]

Thank you, and again and welcome everyone to Luby's 2017 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 26, 2017. 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, and 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 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 Tropoli, our Chief Operating Officer. Our first quarter results reflect a sluggish consumer landscape and a comparison of solid prior year sales and store level profit margin performance. While we are not satisfied with our first quarter results, we remain optimistic in our ability to demonstrate improvement and to strengthen our brands over the long-term. Most importantly, our entire team remains focused on providing an enhanced guest experience at each of our brands, to change the trajectory of our business segments and drive shareholder value. During the first quarter, four new Fuddruckers franchise locations opened, two in the United States and two internationally. We are pleased with the continued progress of expanding our Fuddruckers brand footprint, both in America and abroad. We ended the first quarter with a decrease in total company same-store sales of 2.3% compared to the first quarter of 2016. Last year, our first quarter same-store sales increased 1.4% compared to 2015. As we are seeing across, the restaurant sector, several economic factors continue to put pressure on restaurant same-store sales and restaurant margins. These pressures and soft sales trends have continued through January as well. Despite these challenges, we continue to operate our iconic brands in diversified markets throughout our country. Our brands offer, unique dining experiences with excellent food selections that our customers have loved and trusted for decades. Each of our brand teams and restaurant associates are focused on providing the best possible guest service every time customers visit our restaurants. We continue to firmly believe that our brand's reputation, high-quality food offerings and exceptional service are the recipe for long-term sustainability and growth. I'd now like to 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 have posted an investor presentation on our website at lubysinc.com, under Investor Relations section. This presentation contains some additional information that we believe will be helpful to investors. So, I like to start off beginning with our company-operated restaurant business segment. Restaurant sales in the first quarter decreased 4.8% primarily due to underperforming store closures and to a lesser extent same-store sales which Chris had mentioned were down 2.3%. We are comparing against the prior year when we utilized greater level of menu discounting and coupons in efforts to drive guest visits. However, we are reducing from this high level, the level of discounting in order to maintain pricing levels necessary to improve our store level profit margins. Cafeteria same-store sales decreased 2.2% in the first quarter over the prior year, and this decrease was a result of a 1.4% decrease in guest traffic for the quarter and a 0.8% decrease in average spend for guest. Interestingly to note, guest traffic only turned negative in the last four weeks of the quarter. Contributing to this decline was a reducing in discounts offered in the back half of the quarter. Luby's Cafeteria average weekly sales per unit in the quarter were 49,000 per week. Moving on to Fuddruckers restaurants, Fuddruckers same-store sales decreased 1.6% in the first quarter. The 1.6% decrease was the result of a 2.7% decline in guest traffic, partially offset by a 1.1% increase in average spend per guest. Now in our largest market of Texas, company-operated Fuddruckers same-store sales were down to a lesser extent, down 0.9%. In our Houston Metro area, our Fuddruckers stores were down only 0.2%. Houston is also our most concentrated market from a marketing perspective. Fuddruckers average weekly sales per unit were 30,000 in the quarter, per week. Combo location same-store sales declined 2.3% in the first quarter. Combo average weekly sales averaged 83,000 per week in the quarter. And then lastly our Cheeseburger in Paradise locations which represents eight Cheeseburger in Paradise locations, sales were down 7.8% in the first quarter. I also like to note that in this first quarter, Cheeseburger was up against same-store sales increases of 5.5% last year. Cheeseburger average weekly sales per unit were 34,000 in the quarter. Brings us to store level profit for the company-operated business segment which we define as restaurant sales plus vending revenue, less cost of food, payroll related cost and other operating expenses and occupancy costs, were $12.6 million or 11.7% of restaurants sales in the first quarter compared to $16.8 million or 14.8% of restaurant sales during the first quarter in fiscal 2016. Food cost actually declined about 10 basis – improved by 10 basis points in the quarter. Payroll and related costs as a percentage of restaurant sales increased 1.1% to 35.8% this year in the first quarter, primarily due to higher wage rates and lower overall sales volumes. We did benefit – the dollar has benefitted slightly by a reduction in worker's compensation estimates by about $0.5 million in the quarter, partially offsetting the increase in labor cost. Our other operating expense line increased approximately $1.2 million. Half of this increase is attributable to a spike in repairs and maintenance activity compared to the lower level we experienced in the prior year. And we also experienced higher network infrastructure, POS, utilities, food-to-go packaging and credit card fees increases in that business line. Moving on to our Culinary Contract Services business segment, revenues decreased to $4.3 million from 23 operating locations at the end of the quarter compared to $4.9 million from 28 operating locations at the end of the fourth first quarter in 2016. The Culinary segment profit was 11.3% of its sales this year in the first quarter, up from 10% in the first quarter last year. While the overall number of locations declined, our profit margin dollars were only down slightly year-over-year. Turning to our Fuddruckers franchise business segment, revenue decreased 12% or $254,000 compared to the first quarter last year. We ended the first quarter with 113-franchise restaurants, up from a 110 at the end of the first quarter of 2016. This decrease in revenue included a $151,000 decrease in franchise royalties due in part to same store sales decline of franchise locations and the closure of four locations. And then also, an approximate $103,000 decrease in non-royalty related franchise fee income due to fewer openings in the first quarter compared to first quarter last year. Overall, our adjusted EBITDA decreased to $1 million in the first quarter compared to $5.7 million in the first quarter fiscal 2016.The decline in EBITDA was a result of the lower store-level profit driven by a $2.5 million decline in same-store sales and also higher labor and operating cost as we covered primarily from labor and operating cost, and also from a decline of $0.6 million in lower franchise segment profit and $0.5 million increaser in marketing and advertising expenses. EBITDA as measured in our bank covenants on a trailing four quarter basis was $17.5 million. This includes the loss of $0.7 million from underperforming stores that had closed. Removing the impact of these stores, our trailing EBITDA was $18.2 million and our debt-to-EBITDA ratio was 2.2 times. Moving on to the balance sheet, we ended the fourth quarter with a debt balance outstanding of $39.4 million, up from $37 million at the end of fiscal 2016. During the first quarter, our capital expenditures were $5.0 million compared to $5.7 million in the first quarter of fiscal 2016 as we began curtailing our capital investments. In addition we have $7.1 million of property held-for-sale on balance sheet represented under property held-for-sale and assets from discontinued operations. And with that, I will now turn the call over to Peter Tropoli, our Chief Operating Officer for an update on operations and marketing.

[Peter Tropoli:]

Thank you, Scott. I will now give our operating report. We remain focused on the key drivers of our businesses to achieve operational excellence, grow profitability and enhance shareholder value. We are dedicated to achieving this goal. From an operating standpoint, we support this goal through the following long-term efforts, consistently successful execution, hot delicious food, helpfully served with a smile every day to every guest at every restaurant we operate or franchise. Growing our human capital. Our team members are the most critical factor in ensuring our success. Our reluctance focus must be on training, equipping, inspiring and developing our team members to delight our guest. Raising awareness of our brands, we will continue to develop ways to connect and build our brands with existing and future guests, digitally, as well as eye-to-eye to gain better insights. We must share our unique story with our communities as well as in our restaurants. This allows new guest to learn our story and also reaffirms it with legacy and loyal guests. Loyal guests will spread and increase the word about our brand. Improving restaurant appearances. We recognize the importance of upgrading and remodeling our legacy restaurants to remain competitive, relevant and appealing to keep loyal guest coming back and draw new ones in, and to convert occasional guests into loyal fans and ultimately to increase sales and profitability. However, in the short term, fiscal year 2017 does pose some challenges to our industry and to our business. Sales results have been choppy to say the least. We have successfully weathered other storms in the past however and we are confident we will do so again and put our company on a path towards long term growth. In the meantime, we are taking prudent and necessary actions to preserve capital though the following steps. We previously paused non-essential capital investment other than what is required to maintain our restaurants and we temporarily paused commencing new remodeling projects. Second, we will continue to evaluate and close underperforming locations in order to redeploy capital into higher return opportunities. In fiscal 2016, we reduced our capital expenditures by 10% to $18.3 million. We plan to maintain this trajectory through 2017 to further reduce our spend. Third, we are actively pursuing closing the sales of our excess assets held-for-sale to reduce outstanding debt and for management of our balance sheet. Four, we will continue to prudently manage our corporate overhead expenses going forward. We also continue to refine tools to optimize the deployment of labor in our restaurant to manage that line better. Five, we will continue to pursue lower capital intensive efforts in our franchise segment as well as in our Culinary Contract Services segment. During the quarter, we announced new partnerships and offerings as well as further expansion of our Fuddruckers brand through new restaurant franchise openings. In addition, in December we announced a new and exclusive partnership with H-E-B grocery stores in the state of Texas to sell Luby's famous macaroni and cheese. Beginning on December 5th, fans of the classic dish can now dig in on the original as well as a signature jalapeno version on demand in H-E-B grocery stores in the freezer aisle. H-E-B is a leading grocery store chain in Texas with approximate 270 locations. We are already at work on the next extension of this relationship and anticipate in early 2017 launch of another Luby's favorite bringing in our famous fried fish entree for H-E-B shelves. Our team will continue to experiment with product selection for this sales channel. During the quarter, we also announced the date of January 16th as the opening of the third restaurant in our franchise partnership with – between Fuddruckers and TravelCenters of America. A new home for the world's greatest hamburgers has now opened within a popular truck stop casino and convenience center in Sparks, Nevada, our second location in Sparks. We've established this partnership with TravelCenters last year and debuted similar operations in Commerce, Georgia in February and Ashland, Virginia in May. Later this year, we plan to open a new Fuddruckers restaurant in the Woodlands, Texas which is a thriving community and business center North of Houston. As we have discussed previously, our Fuddruckers franchise business set a recent high mark for the number of openings in a single year with 13 in fiscal year 2016, and we have already opened four new locations in fiscal year 2017. We are building a worldwide gourmet hamburger brand in United States as well as around the world. Our franchise pipeline remains resilient. We expect to maintain our current momentum by opening more new locations in the coming years. Before we turn the call over for questions, I would like to personally thank our team members, as well as our restaurant leaders for their continued efforts to delight and wile our guests every single day. You are our company's greatest asset and you are the key to our success. Operator, we are now ready for questions.

[Operator:]

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. At this time, I will turn the floor back to Chris Pappas for closing remarks.

[Chris Pappas:]

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

[Operator:]

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