Luby's, Inc.
Q2 2017 Earnings Call Transcript

Published: 20 Apr 2017

[Operator:]

Greetings and welcome to Luby’s Fiscal 2017 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Steve Goodweather. Thank you, Mr. Goodweather, you may begin.

[Steve Goodweather:]

Thank you. And again welcome everyone to Luby’s 2017 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 reported on this call speaks only as of today, April 19, 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 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?

[Chris Pappas:]

Thanks, Steve. Good morning, everyone and afternoon 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 second quarter same-store sales represented a decline of 3.8% compared to an increase of 2.2% in the same quarter last year. During the quarter, we improved cost controls in several areas of our operations, including corporate overhead. We also reduced our level of capital spending. However, the gains achieved on the cost side did not help pace the decline in the sales for the quarter. Moving forward, we remained committed to effectively managing expenses downwards while focusing on enhancing our customer’s experience to improve restaurant sales across all our brands. We remain optimistic in our ability to demonstrate improvement and to strengthen our brands over the long-term. During the quarter, we opened 3 Fuddruckers franchise restaurants, 1 domestic and 2 international locations. In addition, we opened 1 new company-owned location earlier this month in our third quarter of fiscal 2017. In December, we announced a new and exclusive partnership with H-E-B Grocery stores in the state of Texas to sell Luby’s famed macaroni and cheese. Then in February, we expanded our reach in our product line to include Luby’s famous fried fish. We remain encouraged by the sales of these dishes and for the opportunity this additional branding of our products establishes for our company. The restaurant segments in which we operate remain highly competitive and the broader economic landscape for consumer spending is relatively tough. But we operate our current brands in diversified markets throughout the country and 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 guests visit our restaurants. We continue to firmly believe that our brand’s reputation, high-quality food offerings and exceptional service are the recipe for the long-term sustainability and growth. I would now like to turn the call over to our CFO, Scott Gray to review our key financial metrics from the second quarter. Scott?

[Scott Gray:]

Thank you, Chris and good afternoon everybody. Before I get started, please note that we posted our investor presentation on our website at lubysinc.com under the Investor Relations event section. The presentation contains some information that we believe will be helpful to our investors. Beginning with our company operated restaurant business segment, throughout much of calendar 2016, we managed to maintain a relatively level year-over-year sales despite a growing recessionary trend in the restaurant industry. However, this downward pressure on sales that began at the end of the calendar 2016 persisted through our second fiscal quarter which ended in the middle of March. Overall same-store sales as Chris stated were down 3.8% in our second quarter. Our total restaurant sales, which were combined with the closure of 6 underperforming restaurants over the prior year, declined by 6.1%. Luby’s Cafeteria same-store sales in the quarter decreased 4.4%, up from the prior year. The decrease was a result of the 6.6% decrease in guest traffic partially offset by a 2.2% increase in average spend per guest primarily due to modest price increases and less discounting. Luby’s Cafeteria’s average weekly sales per unit in the quarter were $48,000 per unit per week. Fuddruckers restaurants same-store sales decreased 1.1% in the second quarter. This 1.1% decrease was a result of a 3% decrease in guest traffic offset by a 4.1% increase in average spend per guest. Interesting to note that Fuddruckers same-store sales were positive during the last 8 weeks of the 12-week quarter. Fuddruckers average weekly sales per unit were 32,000 in the quarter. Combo locations which is the Luby’s and the Fuddruckers at one location declined 6.5% in the second quarter. Half of this decline can be attributable to a single location. We did have 2 locations that grew sales in the 2% to 3% range. Combo average weekly sales per unit were $83,000 in the quarter. Cheeseburger in Paradise representing all 8 Cheeseburger in Paradise locations decreased 7.3% in the second quarter. This compares against the prior year when we grew sales 4.2%. Cheeseburger average weekly sales per unit were $34,000 in the quarter. Our store-level profit, which is defined as restaurant sales plus vending revenue, less cost of food, favorable-related cost and other operating expenses and occupancy cost was $10.2 million or 12.6% of restaurant sales in the second quarter compared to $12.7 million or 14.8% of restaurant sales during the second quarter fiscal 2016. We benefited from food commodity cost decreases of roughly 3% for the key ingredients we purchased. This positive impact combined with modest price increases and continued careful food cost management as guest traffic decline resulted in a decrease in food cost as a percentage of restaurant sales to 27.9% compared to 28.5% in the second quarter last year. Payroll and related cost as a percentage of restaurant sales increased 1.5% to 36.1% this year in the second quarter. This increase as a percentage of restaurant sales was a result of the decline in sales – same-store sales and hourly labor rates which continue to rise in our industry. As we move forward, we continue to focus on labor deployment training and scheduling software utilization and menu price increases to offset these inflationary cost pressures. Our other operating expense line remains flat compared to the same period last year at $13.7 million in the second quarter, but increased 1.1% as a percentage of restaurant sales. This increase as a percentage of sales – restaurant sales was a direct result of the decline in same-store sales in the quarter and higher repair and maintenance costs, food delivery costs and other operating expenses. It is noteworthy that stores that we closed over the prior 12 months reduced sales by $2 million in the quarter and had a negative impact on a store level profit of $0.3 million due to carrying cost and closure cost. Now, moving on to our other business segment, Culinary Contract Services. Revenues in Culinary Contract Services decreased to $3.3 million with 23 operating locations at the end of the quarter compared to $3.9 million with 28 operating locations at the end of the second quarter fiscal 2016. Despite this decline, Culinary segment profit was 10.5% of Culinary sales in the quarter compared to 10.2% in the second quarter last year. We continue to exceed our profit targets of 8% to 10% with this business segment. In addition, our sales pipeline continues to strengthen and we anticipate opening 2 or more locations before the end of this fiscal year. Turning to our Fuddruckers franchise business segment, revenues increased 7% approximately $119,000 compared to the second quarter last year. We ended the second quarter with 114 franchise restaurants up from 110 at the end of the second quarter last year. The increase in revenue was due to a $0.3 million increase in realized franchise development fees partially offset by a $200,000 decline in franchise royalties due to the year-over-year franchise these sales declines and a change in the mix to the franchise locations. We are over the prior one year period. We had 12 franchise location openings offset by 8 franchise locations closings. Overall, adjusted EBITDA decreased by $1.6 million to $3.3 million in the second quarter compared to $4.9 million in the second quarter fiscal 2016. The decline in EBITDA was the result of the lower store-level profit driven primarily by the decline in same-store sales offset by $800,000 decrease in selling and general administrative expenses. Also, due to the continued headwinds in our industry and our cumulative 3-year book loss, which is – we have reflected an increase in our deferred tax valuation allowance of $6.6 million in the quarter. Additionally, management has recorded asset impairments of approximately 5.9 on 13 locations. Excluding these non-cash charges and other asset gains and losses on disposal in the comparative quarters, our results from continuing operations, excluding these special non-cash items improved by approximately $1.2 million year-over-year on a decline in total revenues for the company of $5.7 million in the quarter. Now, moving on to the balance sheet, we ended the second quarter with a debt balance outstanding of $37.4 million. It’s up slightly from $37 million at the end of the last fiscal year. During the second quarter, our capital expenditures were $3 million compared to $5.2 million in the second quarter fiscal 2016 as we began curtailing our capital investments. It is important to note that our EBITDA which impacts our debt leverage and coverage ratios is highly sensitive to sales trends. A 1% change in our cafeteria sales base of approximately $220 million results in about a $1.4 million in store level profit. Similarly, a 1% change in our Fuddruckers units base of approximately $100 million results in a $0.7 million change in store level profit. On a combined basis of these two core brands, that is Luby’s and Fuddruckers together, we see about a $2 millions swing in store level profit and EBITDA for a 1% change in sales up or down. If it’s $2 million, it is approximately $12 million of our current trailing EBITDA. EBITDA as measured in our bank covenants on a trailing four-quarter basis was $16.9 million. As of the end of this quarter, this includes removal of losses of approximately $0.7 million related to the underperforming stores that had closed. On this basis, our debt-to-EBITDA ratio was 2.2x. Our team is focused on achieving and maintaining acceptable debt levels and we have taken action to reduce our CapEx given our year-to-date decline in EBITDA. We have invested $8 million in CapEx so far this year and we expect our capital expenditures to be less than $6 million over the balance of this fiscal year for a total annual CapEx for FY ‘17 of less than $14 million, which compares to $18.3 million in fiscal year ‘16 which is a 23% reduction in CapEx. 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. Operationally, this was a difficult quarter. Guest traffic and sales report results were challenging especially in December and January. This has been reported on a widespread basis in our industry. Industry issues include too many seats, competition from grocery stores, Uber and Amazon effect, government regulations and labor issues, expenses and as well as low unemployment. Despite these challenges to our industry into our business, we are working tirelessly to make the necessary adjustments to make our company even stronger going forward to maintain operational excellence, grow profitability and enhance shareholder value. From an operating standpoint, we support this goal first through the following long-term efforts. Consistently successful execution, hot delicious food helpfully served with a smile everyday to every guest and every restaurant we operate. Growing our human capital, our focus must be on training, equipping, inspiring and developing our team members to delight our guests. Raising awareness of our brands, we must share our unique story with our communities as well as in our restaurants and continue to develop ways to connect and build our brands. Improving restaurant appearances, we recognized the importance of cleanliness, maintenance and appearance of our legacy restaurants to remain competitive and appealing. In addition to these, we are focused on three areas of improvement that are underway

[Chris Pappas:]

Thank you all for joining us today. We have got a lot on of our plate. We are in the restaurant business. And we look forward to visit with you again and talking about our favorite subject, Luby’s Cafeteria and their related restaurant company stores. Thank you very much and we will visit with you again this summer and on our third quarter call.

[Operator:]

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