Luby's, Inc.
Q2 2016 Earnings Call Transcript

Published: 14 Apr 2016

[Operator:]

Greetings and welcome to the Luby’s Fiscal 2016 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, VP of Financial Planning, Analyst and Investor Relations. Thank you. You may begin.

[Steve Goodweather:]

Thank you. And again welcome everyone to Luby’s 2016 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 recorded on this call speaks only as of today, April 14, 2016. Before we continue, I would 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; and 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. Before proceeding, I would like to mention the second quarter results for 2016 represent a 12-week period from December 17 to March 9. However, our prior year fiscal second quarter ended on February 11, 2015. So, for year-over-year comparison purposes, we will at times reference a comparable prior year 12-week period that ended March 11, 2015. This is also depicted on the charts in our press release. With that, I would now like to turn the call over to Luby’s President and CEO, Chris Pappas.

[Chris Pappas:]

Thanks, Steve. Good morning, everyone and thank you for joining us on today’s conference call. With me today are Scott Gray, our Chief Financial Officer and Peter Tripoli, our Chief Operating Officer. We are pleased to report a solid quarter across all our brands. In addition to good same-store sales results, we reported revenue growth in each of our segments that included restaurant sales, culinary contract sales and franchise sales. A leading indicator of restaurant performance is same-store sales and our brands performed well during the quarter. Same-store sales for our restaurants segment were up 2.2% marking our third consecutive quarter of same-store sales growth. At Luby’s cafeteria, same-store sales were up 3.1% led by increased guest traffic of 4.7%. We extended limited time offers at certain times to encourage guest traffic at Fuddruckers, while same-store sales were steady year-over-year revenue was up due to additional locations. Fuddruckers’ guest traffic was down in the quarter, but that decline was offset by an increase in average spend per guest, some of that increase comes from modest price increases and some comes from new product mix and guest selecting add-on options. At Cheeseburger in Paradise, sales were up 4.2%, which marks three consecutive quarters of growth as this brand continues to improve its sales results. Overall, growth in sales along with lower food commodity prices and lower utility cost generated higher store level profit margins of 14.8%. This improvement grew EBITDA by $1.4 million over the comparable period and $1.6 million over the February ended quarter in the prior year. Our team is performing well and our companywide plans to enhance profitability are gaining traction as we execute the store level operational initiatives that we introduced in fiscal 2015. Primary guest initiatives include focusing on team members and leadership development enhancing the experience and loyalty of our guests and continuing to develop a genuine hospitality culture at our company. These efforts contribute to growing guest traffic and sales leading to shareholder value. All of these items support our goal of improving store level profit and driving EBITDA growth. We believe that our focus on consistent operational execution at our company-operated restaurants as Scott Gray will present and our continued business development of Luby’s culinary services and continued growth of Fuddruckers, the world’s greatest hamburgers around the country and the world will drive our long-term results for our shareholders. By maintaining performance levels, we have established through the first two quarters of the year at each of our business segments, we continue to expect to generate positive net income in the second half of the year. I will now turn over the call to our CFO, Scott Gray, to review our key financial metrics from the second quarter fiscal 2016. Scott?

[Scott Gray:]

Thank you, Chris. Before I get started, please note that we have posted as customary an investor presentation on our website at lubysinc.com under the tab Investor Relations in the Events section. The presentation contains some additional information that we believe will be helpful to investors. Beginning with total company restaurant sales, total company restaurant sales increased by more than $1.8 million to $86.3 million over last year, that was primarily driven by a 2.2% increase in same-store sales as well as the opening of new restaurants. By brand, Luby’s cafeterias same-store sales were up 3.1% driven by strong guest traffic, which was up 4.7%. Fuddruckers same-store sales were flat year-over-year overall, however, were up 2.6% and our largest market, which is Houston, Texas, which represents 30% of our company-operated Fudd’s restaurants. These sales increases were offset by the impact of weather on certain East Coast markets that experienced severe winter storms in the quarter. Store level profit was $12.7 million in the second quarter, up $1.4 million over last year. As a percentage of restaurant sales, lower cost in all store level cost categories contributed to our improved same-store level profitability in the quarter. Our food cost as a percentage of restaurant sales was held by moderating food commodity cost, down 130 basis points year-over-year and 60 basis points when compared to the 12-week comparable period. We expect the comparison of certain food commodity costs, particularly beef, in the second half of the year to continue to be favorable to last year based on current pricing levels. Payroll and related costs declined slightly due to an increase in same-store sales and a reduction in workers’ compensation expense in the quarter. Regarding operating expenses, lower utility expense and lower repairs and maintenance activity accounted for much of the improvement in operating expense in the quarter, which were operating expenses in the quarter were $13.7 million compared to $14.2 million last year. And moving on to our culinary contract services business segment, we experienced a net increase of four locations and reported increased revenues of $3.9 million with 28 operating locations this year compared to $3.8 million with 24 operating locations last year. Culinary segment profit this quarter was 10.2% of culinary contract sales this year compared to 10.6% last year. We continue to exceed our profit targets for this segment, which are between 7% and 9%. Additionally, we are currently in advance discussions to partner with a large hospital operator to provide our high quality offerings in multiple sites. And we will be giving an update on that once we have finalized our discussions. Our culinary contract services development pipeline remains robust. Now, turning attention to our Fuddruckers franchise business segment, revenue was up 8.5% compared to the same 12-week period last year due to increases in the number of franchise locations. From our franchise pipeline perspective, we have already opened 10 Fuddruckers franchise locations thus far in fiscal 2016. Two of these openings took place in March after the end of the second quarter. We estimate at least three additional Fuddruckers openings through the rest of fiscal 2016 bringing our total number of new openings to at least 13 total Fuddruckers franchise openings for the full year. As we have continued to add development agreements to our pipeline, for future new Fuddruckers franchise locations, our balance sheet reflects $1.7 million in deferred franchise revenues outstanding as of the quarter end. We expect to recognize these fee amounts as new franchise units open over the coming years. This franchise pipeline includes over 80 potential future openings that are under development agreements. These are listed by location on Page 16 in our investor pack. Our positive sales momentum combined with lower store level operating expenses and reduced costs associated with opening restaurants and lower G&A as a percentage of sales excluding marketing year-over-year in both the quarter and year-to-date, all led to a $1.4 million increase in EBITDA that Chris previously discussed. Year-to-date, compared to the same period last year, EBITDA is up $3.8 million. Now moving on to the balance sheet, under our revolving credit facility we ended the quarter with a debt balance of $37 million compared to $37.5 million at the end of last quarter. During the second quarter, we invested $5.2 million in capital expenditures, remain on pace to spend our targeted under $20 million in fiscal 2016, which that estimate excludes any potential land purchases for future development. Our trailing full year EBITDA further improved this quarter by $1.4 million from $20.5 million last quarter to $21.9 million, a 6.8% improvement resulting in a debt to EBITDA ratio of 1.7x, which is a significant improvement over the past 12 months. And with that, I would like to turn the call back over to Chris.

[Chris Pappas:]

Thank you, Scott. As we stated before, our goal is to generate consistent and sustainable same-store sales growth and improve store level profit. We have maintained the momentum in same-store sales comps that began in 2015 and we are pleased to have continued that trend with positive same-store sales through the first two quarters of 2016. Building on the operational initiatives we began in 2015 and with a longstanding commitment to guest satisfaction, we have a positive outlook for sales in 2016. We also believe our price and value positioning within popular sectors of the market will allow our brands to continue to grow. We operate an iconic brand in key dining segments of the restaurant space with deeply loyal guests. We are dedicated to these guests to provide the best food and service available everyday by these brands. Our focus is and always has been delivering on the long-term value of our company, which includes sustainable growth of our mature brands developing our franchisees and culinary contract services segments and effectively managing costs companywide to enhance our profitability. We are pleased with the store level profit and EBITDA improvement we are realizing in 2016 and we wish to thank all our team members that contributed to this quarter’s and our year-to-date results in 2016. I am confident in the direction and initiatives being executed by all of our teams that are the keys to growing EBITDA increase our shareholder value. So operator, I will now turn it over for questions.

[Chris Pappas:]

Well, thank you, operator. And I want to thank all of you for joining us today. And we look forward to speaking with you again next quarter.

[Operator:]

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