Luby's, Inc.
Q4 2017 Earnings Call Transcript

Published: 12 Nov 2017

[Operator:]

Greetings, and welcome to the Luby's Fiscal 2017 Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steve Goodweather, VP Finance and Investor Relations. Thank you. You may begin.

[Steve Goodweather:]

Thank you. And again, welcome, everyone, to Luby's 2017 Fiscal Fourth 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, November 9, 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 of 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 risk and uncertainty disclosed in the company's periodic reports on Form 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, Chief Financial Officer and Peter Tripoli, our Chief Operating Officer. Before we begin our review of the quarter and the fiscal year, I'd like to take a few minutes to comment on the effects of hurricane Harvey that has fairly affected and impacted the Houston area, our primary market for both Luby's and Fuddruckers. The Gulf Coast received over 51 inches of rain and 19 gallons of rainwater during the prolonged storm impacting our last week of fiscal 2017. We lost approximately 200 days due to the store closures, we estimate that these loss sales reduced our quarter four and fiscal year 2017 EBITDA by approximately $1.5 million. This was a direct result of employees and guests not being able to access the restaurants as well as some of the costs related to repairs and spoiled food. However, our office remained fully functional and our IT systems stayed in order. We were very fortunate that with 60-plus units in harm's way, no Luby's suffered major damage and only two Fuddruckers sustained flooding damage and remained closed for restoration. As we've been in the stores and communicated with our employee, I cannot say enough about the teams that we've built. The teams worked tirelessly to get all of our restaurants cooking again so we could feed the communities that we love and serve. I want to thank our team for their extraordinary service and acknowledge their great work, managing this difficult situation, working tirelessly on behalf of our guests and the company. Our entire company is proud to be Houston strong. Turning now to our operational and financial performance for the quarter in fiscal 2017. We ended the year encouraged with continued progress of operational and guest initiatives that were implemented to help improve guest service, store level profit and EBITDA going forward. However, we still remained in a challenging economic environment with industry pressures that are affecting sales growth. With that backdrop, our same-store sales declined 3.4% for the year, which includes the impact of hurricane Harvey. Absent the hurricane, sales trends improved significantly as we moved through the second half of fiscal 2017. More details are included in our press release. The sales decline did not deter us from the cost control program initiated earlier in the year. And we have realized cost savings in many areas of our operations, including corporate overhead, certain restaurant operating costs and a decreased level of capital spending. In addition, our Culinary Contract Services revenue grew significantly in the fourth quarter and is on the path to show meaningful growth in fiscal 2018. Finally, from a strategic perspective, our preference has always been to own a property at our restaurant locations especially for the Luby's brand. Overtime, that ownership provides options, particularly, when the neighborhoods change, highway systems or market changes over time. Many of our restaurants have been in operation for more than 30 years and in some cases, we have seen those areas change significantly. We continually review the ongoing performance of all of our restaurants and make certain determinations based on historical results, local market conditions and other factors that may result in restaurant closures. In fiscal 2017, nine underperforming company-owned restaurants were closed that in the aggregate were not contributing to profitability. During the year, we sold properties totaling $8 million and use those proceeds to reduce our long-term debt and to prepay over one full year of minimum principal payments. Our long-term plan is to redeploy these proceeds into investments with more suitable return characteristics. In the interim, we continue to develop low capital areas of our business, such as our Culinary Contract Services and our Fuddruckers franchise segments. We also sold one company Fuddruckers franchise location to one of our largest franchisees in fiscal 2017. I will now turn the call over to our CFO, Scott Gray, to review key financial metrics from the fourth quarter and fiscal 2017. Scott?

[Scott Gray:]

Thanks, Chris. Before I get started, please note that we posted our investor presentation on our website found at lubysinc.com under the Investor Relations tab in the Event section. Presentation contains some additional information that we believe will be helpful to our investors. Investors may also find useful results, highlights of our results and year-over-year comparisons in our press release and 8-K filed after the market closed yesterday. As a reminder, our fourth quarter and fiscal 2017 had one less operating week than the prior-year. Beginning with our company operated restaurant business segment. Restaurant sales in fiscal 2017 decreased 5.4% after moving the extra REIT from the prior-year. This decline includes roughly a 2% reduction in restaurant sales due to store closures that Chris mentioned and 3.4% reduction in same-store sales. Excluding the Harvey impact, which resulted - reduced our same-store sales by approximately 80 basis points or 0.8%, same-store sales would have been down only approximately 2.6%. The impact of hurricane Harvey on same-store sales accounted for approximately 1% reduction in Luby's cafeteria same-store sales and approximately 0.6% reduction in Fuddruckers same-store sales. With regards to fiscal fourth quarter sales on a 12-week-to-12-week year-over-year basis, Luby's Cafeteria's same-store sales decreased 4.5% compared to the fourth quarter last year. The decrease was a result of an 8.6% decline in guest traffic, largely due to less discounting offset by a 4.1% increase in average spend per guest primarily due to modest price increases. Hurricane Harvey reduced Luby's same-store sales by approximately 3.9% in the quarter. Luby's Cafeteria's average weekly sales per unit in the quarter were $47,000 per week with 59% of our restaurant segment profit in the quarter generated by the cafeteria brand. It remains one of our biggest opportunity, areas for improving company profitability who work on growing sales, leading to improved margins. For the fiscal year, Luby's cafeteria same-store sales were down 3.3% and sales averaged $2.6 million per unit with an average store level profit of approximately $400,000 per unit. Our highest quartile stores performed in excess of $600,000 per unit on average. Fuddruckers restaurant same-store sales decreased 3.6% in the fourth quarter. The decrease was the result of a 7.6% decrease in guest traffic, offset by 4% increase in average spend per guest. Hurricane Harvey reduced Fuddruckers same-store sales by approximately 2.3%. Fuddruckers average weekly sales per unit in the quarter were $32,000 a week in the quarter. For the fiscal year, Fuddruckers same-store sales decreased 1.8%. Fuddruckers sales averaged $1.5 million per unit in fiscal year 2017, with an average SLP of $150,000 per unit. And the high quartile of our location at Fuddruckers performed in excess of $300,000 per unit on average. Combo unit locations same-store sales representing six combo locations, declined 7.2% in the fourth quarter. For the fiscal year, combo same-store sales were down 5.3%, Hurricane Harvey reduced combo location same-store sales by approximately 0.7%. And combo average per unit sales averaged $3.6 million in fiscal 2017. Cheeseburger in Paradise, representing all 8 Cheeseburger in Paradise locations decreased 15.4% in the fourth quarter. For the fiscal year, Cheeseburger in Paradise same-store sales were down 10.5%. Cheeseburger in Paradise sales averaged $48,000 per week in the quarter and $2.1 million in annual sales per unit in the fiscal year. While these sales results are below our expectation for this brand, its overall store level profit remained positive in fiscal 2017 but below its performance last year. We have closed 1 of the 8 Cheeseburger locations in Maryland in fiscal 2018. Our overall for the business segments, store level profit defined as restaurant sales plus vending revenue less cost of food, payroll and related costs, other operating expenses and occupancy cost was 10.8% of restaurant sales in the fourth quarter compared to 14% of restaurant sales during the fourth quarter last year. Store level profit was 12.2% of restaurant sales for the 52-week fiscal year 2017 compared to 14.7% of restaurant sales for the 53 weeks in fiscal 2016. The decline in margin for both fourth quarter and the fiscal year was driven primarily by declines in same-store sales and to a lesser extent, higher restaurant operating cost for repairs and maintenance and other operating expenses. Moving on to our Culinary Contract Services business segment. Revenues in this segment increased to $5.8 million with 25 operating locations at the end of the quarter compared to $4 million with 24 operating locations at the end of the fourth quarter last year. We ended fiscal 2017 with a profit margin of 12.1% in this business segment, exceeding our long-standing annual targets of 7% to 10%. Turning to our Fuddruckers franchise business segment. Revenues decreased by $1.6 million compared to the fourth quarter last year due in part to one less operating week and decreases in sales volumes at franchise locations. We ended fiscal 2017 with a 113 domestic and international franchise locations, level with the end of fiscal 2016. During the year, we had eight new locations opened and some legacy locations closed. For the 52-week year, adjusted EBITDA was $13.3 million, down over $8 million in fiscal '17 compared to $22.1 million in the 53-week fiscal 2016 year. The decline in EBITDA was primarily the result of a $12.5 million reduction in store level profit, partially offset by higher Culinary Contract Service segment profit. And significantly offset by $4.5 million in lower corporate overhead expenses. The lower corporate overhead included reductions in overall compensation expense, corporate travel expense, marketing and advertising and outside professional services fees. Of the $8 million decline in the fiscal year, $6 million of that occurred in the first two quarters of the year. Our year-over-year results began to more closely track the prior-year during the second half of the year. To point out an industry comparison, we believe that we were impacted by the following. The first two quarters were impacted by a dramatic shift in retail consumer shopping patterns and behavior, as noted by a 10% decline in brick-and-mortar retail traffic at stores in the month of December 2016, according to Prodco Retail Traffic Index. Peter will be covering our operations action plans to improve performance in the moment. Now moving on to our balance sheet, we ended the fourth quarter with the debt balance of $31 million, down $6 million from last year. During the fourth quarter, our capital expenditures were $2.4 million, compared to the prior year of $3.9 million in the fourth quarter and we continue - as we continue to curtail our capital investments. For the full year, capital expenditures this year were $12.5 million compared to $18.3 million last year. We expect our capital expenditures to be under $12 million in the current fiscal 2018 year as we continue to invest and maintain the attractiveness and functionality of our existing restaurants and to continue to upgrade our IT infrastructure. Before turning the call over to Peter, I'd like to comment on the performance we have seen in the first eight weeks of fiscal 2018. Again, this is not necessarily an indicator for the full year, but we'd like to share the results with you now for both Luby's and Fuddruckers same-store sales are trending positive, while sales at Cheeseburger in Paradise continue to be challenged. And our Culinary Contract Services segment is on track to show meaningful growth in 2018. 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 Tripoli:]

Thank you, Scott and Chris. I will outline the tactics and strategies we're employing to improve our company moving forward and speak to our brands. Our most critical challenge, an immediate need as an organization is profitable sales initiatives. This means our ability to increase the visit frequency of our guests, attract new guests into our restaurants, create new revenue streams and increase our check averages. To do this, we must become an even more hyper-guest-focused organization. We must constantly make ourselves more relevant to guests and better answer what's in it for me to them. This needs to happen at all points of our customer experience loop and our vehicles to success remains in our team members. Operationally, we're addressing this through the following. First, we're striving to be able to speak to our guests more directly and personally. We can meet their needs better once we understand them better. We worked with the top loyalty group to help us craft the next phase of our loyalty and recognition platform and all of our brands moving forward. We're elevating our eClub into a central companywide guest database, thereby creating a CRM, our loyalty platform. Our loyalty program will live on an app that we're developing for each brand. The app will house both mobile ordering and as well as loyalty. And we'll balance it to attempt to maximize the impact between informing, promoting, incenting and rewarding. This will provide a greater platform for guest communication and help us tell them all the great things going on at our brands. Rewards will be based on a surprise-and-delight strategy, which includes distinctive moments, promotion offerings that are unique to each customer and delivered across channels. Next, by elevating culinary and new product development innovation, we intend to increase our appeal and relevance, differentiation and of course, create new revenue streams. Our focus is on taste and flavor, disciplined store level testing, trial and training. This is a very recipe in process driven - and innovation relates to new and existing items as well as legacy ones reviewing and reflecting the best ingredients preparation techniques and recipe updates. This process is led by our executive team as well as our chefs partnering with our units to ensure execution. Building our brand equity means refining our brand strategy, brand story, what we stand for, our unique points of view, our identity, how we show up in the world as well as the operational implications for each of our brands. We've retained the third parties to help us with this process, and we'll use the insights to improve our tactics and to improve customer experience results going forward. And finally, elevating store level operations is really continuing to be the linchpin, a crucial difference maker. This means hot delicious food, helpfully served with a smile, every meal, every day to every guest at every restaurant we operate and every franchise location. We also rolled out two new store level workflow organizational programs allowing us to better monitor our performance, report standardize control and gain visibility into workflow throughout our organization. In both cases, visibility will breed accountability. From a brand standpoint, I will share a bit on how these - how we're supporting these initiatives. And I am pleased to building on what Scott said, I'm pleased to comment on the performance we've seen in the first eight weeks where Luby's and Fuddrucker's same-store sales have been trending positive. Luby's continued its positive momentum in September, which was primarily driven by the Houston market. Operationally at Luby's, we continued progress in key elements of our action plan, completing our seasonal summer menu, which highlighted fresh colorful vegetables as well as new salmon and chicken entrées. And then we rolled out in October, our fall into flavor menu featuring a number of new seasonal items, many new selections including mango chili chicken, holiday pot pie, braised lamb shank, beef stroganoff, braised oxtails, rosemary crusted roast beef are just several of many items that we've introduced, way too many to mention. Other sales initiatives areas of concentration at Luby's include suggested sale add-ons at out Cafeteria counter, deserted Cashman's emphasis, promoting our new 32-ounce drinks and drink attachments. Selected mid-day discount offers at a handful of units only. Breakfast tacos at selective units with drive-throughs, catering, third-party delivery aggregators such as UberEATS, family packages offer-to-go, upgraded coffee offerings and grab-and-go offers near the point of sale. Beginning with our Luby's holiday offerings, we recently launched several campaigns to reinforce brand awareness and consideration as well as online ordering and gift card purchased conversions. You will see these ads on social platforms such as Facebook and Instagram as well as on mobile apps, websites, Gmail or performing a search in Google. At our Culinary Contract Services segment, we grew our revenue in the fourth quarter and are on a path to show meaningful growth in 2018. In addition to our traditional healthcare and business office settings, we now also operate at three sports stadiums. We have several new accounts coming online as well, we are pleased with this trajectory of this segment. At Fuddruckers, recent especially burger limited time offers have been more successful and have raised our menu mixes in recent months, helping us to raise our per-person average. From a culinary standpoint, recent LTOs included our bourbon burger and our stuffed turkey burger. Our avocado crunch burger limited time offering was our most successful yet. Our go-exotic LTO also highlighted our unique buffalo, elk and American Kobe Burger and raised our PPA. Finally, recent shake LPOs included a banana cream pie, shake mocha cappuccino and soon a salted caramel cookie shake. At Fuddruckers, we continue to work with third-party delivery aggregators such as UberEATS and GrubHub to continue to expand our reach, which we've been doing for over a year. From a technology standpoint, we are testing and rolling out more self-serve stations at Fuddruckers and working to complete an update of our mobile app to incorporate loyalty and rewards functions. We recently expanded our presence at NRG Stadium in Houston at Fuddruckers. And we continue to work with our latest store prototype of 4,000 square foot in-line unit north of Houston. This restaurant features two self-order stations in addition to the traditional cashier-lead point of sales, an open kitchen as well as patio and banquet rooms. We continue to work very closely with our franchisees' leadership board to improve our brand together and to align ourselves better as a brand. We continue to work with a top restaurant brand marketing group towards the updating and rebranding and repositioning at our Fuddruckers brand, including many optimization, look and feel decorum, and packaging. Additionally, new franchise development is a crucial component to our plan. Our franchise operations team is working a large list of prospective candidates, several of which we are engaged in active discussions with. Our team is also focusing on sales building and improved restaurant operations at our franchise units, increased emphasis on adhering to our brand standards is the first step. We're completing a marketing checklist on each restaurant to ensure complete participation on our sales building programs. This checklist covers in-store marketing, digital team interaction with guests along with other sales building efforts. By focusing on the right things, we're going to continue to see improvements. From a packaged goods standpoint, our partnership with H-E-B, a Texas born retailers selling our famous macaroni and cheese, and fried fish has continued to exceed expectations. We are hard at work trying to grow that relationship with new products, new product offerings as well as new sales channels. This has been a great opportunity to provide additional awareness of our brand and our beloved products. I am pleased with the progress that our team is achieving to reverse recent negative year-over-year results and to position our company for success moving forward. I'll pass it back to Chris.

[Chris Pappas:]

We'll take questions.

[Operator:]

[Operator Instructions] Thank you, at this time, I'd like to pass the floor back over to Mr. Pappas for any additional concluding comments.

[Chris Pappas:]

Thank you. And I appreciate all of you joining us today and hearing our story and being shareholders as many of you in the company. We believe we're on the right path and doing the right initiatives in a broad number of areas to make Luby's and Fuddruckers the company that we believe in and want to own and grow. So, thank you for all of this, for joining us today and we look forward to speaking with you again in the next quarter. Thank you.

[Operator:]

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