Luby's, Inc.
Q3 2017 Earnings Call Transcript

Published: 13 Jul 2017

[Operator:]

Greetings, and welcome to the Luby’s Fiscal 2017 Third 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, VP of Financial Planning and Investor Relations. Thank you, Mr. Goodweather. You may begin.

[Steve Goodweather:]

Thank you. And again, welcome everyone to Luby’s 2017 fiscal third quarter earnings conference call. This call is also being webcast and can be accessed through the audio link on Luby’s Web site, lubysinc.com. Information reported on this call speaks only as of today, July 13, 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 thank you all for joining us today on the conference call. With me today are Scott Gray, our Chief Financial Officer and Peter Tropoli, our Chief Operating Officer. Our third quarter represented a mix of positive new developments and achievements offset by some continued challenges that are pressuring restaurant sales. Industry pressures persist and consumers continue to have a broad range of choices; two factors contributing to a very competitive restaurant space. With this backdrop, our same store sales declined 2.7% in the quarter. However, we did see improvement sequentially compared to the second quarter of 2017. Despite the sales challenge, we did continue to exercise solid cost controls in many areas of our operations, including corporate overhead, certain restaurant operating costs and a decreased level of capital spending. Additional achievements include the addition of three new Culinary Contract Services locations, which have contributed more than $1 million in revenue in this business segment here in the quarter. In addition, retail product sales added $0.4 million in revenue in the third quarter. We also opened a new Company operated Fuddruckers location with our first self ordering kiosks near the the Woodlands, Texas. I'd now like to turn the call over to our CFO, Scott Gray to review our key financial metrics from third quarter. Scott?

[Scott Gray:]

Thank you, Chris. Before I get started, please note that we've posted an investor presentation on our Web site and it can be found at lubysinc.com under the Investor Relations event section. The presentation contains some additional information that we believe will be helpful to our investors. Beginning with our Company operated restaurant business segment, restaurant sales in the third quarter decreased 4.5% to $82.6 million, primarily due to store closures, and to a lesser extent, same-store sales declines of 2.7%. In our restaurant business segment, the Luby's brand generates the majority of our revenue and is one of our key focus areas with the largest potential for increased profit dollars through sales growth at existing units. Luby's Cafeteria same-store sales in the quarter decreased 2.5% from the prior year. This decrease was a result of 7.1% decrease in traffic partially offset by a 4.6% increase in average spend per guest, primarily due to less discounting and a modest price increase. We believe it is important to note that a year ago, from our advertising and marketing perspective during the third quarter, we were presenting our guests with more frequent incentives. In particular, we made extensive use of BOGO, buy one get one free offers to drive our guest traffic. In fact, we estimate that the guest traffic increased by 2.9% last year in the third quarter as a result of these BOGO offers. We have limited the BOGO offers and are focusing on designing new loyalty enhancement program for our restaurant business segment. Luby's Cafeteria’s average weekly sales per unit in quarter were 48,000 per week with 70% of our restaurant segment profit generated from 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 0.9% in the third quarter. The 0.9% decrease was result of 5a .6% decrease in guest traffic, offset by 4.7% increase in average spend per guest. Fuddruckers’ average weekly sales per unit were 33,000 in the quarter. Combo locations same-store sales, representing six Combo Luby's Fuddruckers locations, declined 9.8% in the second quarter against prior year. The Combo weekly average sales per unit was 83,000 in the quarter. Approximately 70% of the decline in sales at our Combo’s occurred at one Combo location. Two of our six Combo locations increased sales in the quarter by 5.5% and 1.2% respectively versus prior year. Cheeseburger in Paradise representing eight Cheeseburger in Paradise locations, decreased 5.5% in the second quarter, the average weekly sales of the Cheeseburger units was 43,000 in the quarter. It is important to point out that both Cheeseburger in Paradise and Combo locations are contributing to EBITDA in the third quarter despite negative same-store sales comps. Store level profit, defined as restaurant sales for the vending revenue less cost of food, payroll and related cost and other operating expenses and occupancy cost, was $11.6 million or 14% of restaurant sales in the third quarter compared to $13 million or 15% of restaurant sales during the third quarter of fiscal 2016. Store level profit dollars declined in the quarter year-over-year $1.4 million in the quarter on $2.2 million decline in same store sales. In our Culinary Contract Service business segment, revenues increased to $4.5 million with 25 operating locations at the end of the quarter compared to $3.9 million with 26 operating locations at the end of the third quarter last year. The Culinary segment profit in the quarter was 7.2 this is and third quarter down from 9.2 in the third quarter last year due impart to a change in the mix of locations in the quarter. However, we continue to expect the business segment to exceed its profit targets on a full year basis at 8% to 10% of Culinary sales. Turning to the Fuddruckers franchise business segment, revenue decreased $109,000 compared to the third quarter last year due to a reduction in franchise fee income that was earned when new franchise locations opened for business. We ended the third quarter with 112 franchised Fuddruckers restaurants, down from 114 at the end of the third quarter of last year. And in this business segment, our Fuddruckers franchise business segment, we are focused on growing our franchise portfolio that represent a lower cost to capital for improving shareholders value. In our Culinary segment, where we have virtually no capital expenditures, we continue to strive to increase service locations to grow our top line and profit to maintain an 8% or 10% margin on that segment. Overall, adjusted EBITDA decreased $10.2 million, so $200,000, to $5.4 million in the third quarter compared to -- approximately $5.5 million in the third quarter compared to $5.7 million in the third quarter last year. The modest decline in EBITDA was a result of $1.4 million reduction in store level profits, significantly offset by lower corporate overhead expenses. The lower store-level profit was driven primarily by lower sales volume along with higher utility costs, and certain restaurant service costs, primarily offset by favorability in our food cost line. Lower corporate overhead included reductions in overall compensation expense for travel, marketing and advertising expense and outside professional services. Other components of the EBITDA include our Culinary Contract Service business and our Fuddruckers franchise business segment, which contributed to EBITDA similarly to the prior year. The underperformance difference to prior year’s EBITDA has improved sequentially each quarter. If you remember the first quarter, we were down against prior year $4.4 million, in the second quarter we were down $1.7 million versus prior year, and in this quarter, our deficit to prior year has been limited down to $0.2 million. We expect our results to continue to be highly sensitive to the restaurant sales performance, going forward. We attribute this sequential improvement in EBITDA to managing the actions taken recently in response to the negative sales trends in the industry. Peter will be covering operations access plans to improve restaurant sales in a moment. Moving on to the balance sheet, we ended the third quarter with a debt balance outstanding of $40.4 million, up slightly from $37 million at the end of fiscal year 2016 in August. After the third quarter ended, we made $1.8 million required term loan prepayment as a result of cash proceeds generated from the sale of real estate subsequent to the quarter. As a result of this payment, our current portion of our credit facility was reduced to zero. This prepayment also reduced our required calendar quarterly principal payments amounts from $612,500 per calendar quarter down to $525,000 per quarter. As we evaluate and act upon selling selective underperforming locations, such as this one we mentioned, we will be freeing up capital to be reinvested for higher returns in the future. In the interim, proceeds from property sales will be applied to a debt balance to allow for an increased margin and safety in the current and projected business environment. In the third quarter, our capital expenditure were $2.2 million compared to $3.4 million in the third quarter last year, as we continue to curtail our capital investments declined in current year. We expect our FY17 CapEx to be approximately $13 million or 28% less than prior year. And with that, I will now turn the call over to Peter Tropoli, our Chief Operating Officer, for an update on the operations and marketing.

[Peter Tropoli:]

Thank you, Scott and Chris. We are quickly progressing on several focus areas of improvement that we began earlier this year; number one, menu innovation and variety, especially at Luby's. Our current menu enhancements at Luby's were rolled out in early July and we are already seeing benefits. First in foremost, we are highlighting for the foreseeable future new in fresh colorful vegetable presentations. Our stores have a list to choose from daily, which includes roasted carrots, cauliflower, braised purple cabbage, roasted mushrooms, fresh green beans, fresh kale and sweet potatoes. It’s aligned with our brand pillars. Luby’s is one of the only restaurants you can go-to to get such an abundant selection of fresh veggies inside every day. We believe this really differentiates us. We are expanding our cold sides to include several new or at least refresh selections, brussel sprouts, roasted beets, rosemary potatoes, and cranberry salad. Finally, we are highlighting new carts, turkey, roasted beet recipes as well highlighting several new salmon and chicken dishes. We have enhanced our Culinary team with additional resources as well. We will continue to vigorously pursue culinary innovation enhancements, moving forward. At the heart of our current marketing initiatives is developing and even better understanding of our guests and their behavior, focusing on the customer experience loop, leveraging technology to improve and personalize their experience, targeting potential guests with profiles and finally targeting potential guests with profiles similar to our best guests. We will use these insights to refine our brand positioning and brand strategies, going forward. Next, enhancing digital branding and marketing efforts and leveraging technology in our restaurants; this includes, the development of digital loyalty and recognition, digital outreach, mobile ordering, third-party deliver aggregators, self order abilities in the restaurants, as well as types of stay. In this regard, we have made a great deal of progress entering into an enterprise agreement with our POS provider to provide framework to create the next phase of our loyalty platform by early 2018. We are also under weighing the engagement of a third-party to help us track the next phase of our loyalty and recognition platform at all of our brands, moving forward. Again, this will allow us to better understand all of our guest strengthen our relationship with casual guests, make new relationships with new guests as well. Finally, we continue to search and hunt down new sales channels at all of our brands, whether is an upgraded coffee or tea program; a grab and go offering at the point of sale; a family pack to pick up for consumption at home; a catering to an outside group or even a plastic souvenir cup with our logo on it. We started using third-party delivery aggregators at select Fuddruckers last fall and have expanded that program to several Luby's recently. Moving to Fuddruckers, our new Fuddruckers unit, north of Houston near the Woodlands, is an exciting location that truly showcases the future of our brand. The restaurant features two self-order stations in addition to the traditional cashier led points of sale. This is the first of its kind in our restaurants. We continue to introduce new specialty burgers and other offerings at our new Fuddruckers in all our locations to generate enthusiasm and increase frequency as the originator of the better burger concept. We also continue to pursue opportunities to refranchise Company-owned Fuddruckers locations as a part of our strategy to grow franchise revenues, as we've done in certain sector of Kansas over the past few years. After the end of the third quarter, we sold one Company-owned Fuddruckers to one of our existing franchises to operate. Our partnership with APB, a Texas borne retailer selling our famous macaroni and cheese and fried fish, has continued to exceed our expectations. This has been a great opportunity to provide additional awareness of our brand and our beloved products. I would say, in summary, everyone knows the state of our industry that it is experiencing significant disruption right now, and at one of our core markets, Texas has been a weak performing market in recent surveys. But we know that our adaptation and success is going to come from executing the keys to restaurant relevance, high quality food, great service, emotional connection with guests, providing convenience, sharing our story, having attractive and comfortable restaurant appearances and environments and of course, the effective use of technology. I am pleased with the progress that our team is achieving to very quickly reverse recent negative year-over-year results and to position our Company for much success, moving forward. Operator, we're ready for questions.

[Chris Pappas:]

Thank you. And we look forward to having you on fourth quarter conference call.

[Operator:]

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