Luby's, Inc.
Q4 2016 Earnings Call Transcript

Published: 11 Nov 2016

[Operator:]

Greetings and welcome to the Luby's Fiscal 2016 Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Steve Goodweather. Thank you, Mr. Goodweather. You may begin.

[Steve Goodweather:]

Thank you, and welcome everyone to Luby's 2016 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, 2016. 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. As a reminder today, we are discussing our financial results for our fiscal fourth quarter and full year. Our fourth quarter comparison will be the 13-week results ended on August 31, 2016, compared to the 16-week results ending August 26, 2015. As you may recall, in fiscal 2016, we changed the number of reporting weeks included in our fiscal quarters, in part to minimize holiday calendar shifts. Also for our full fiscal year comparison, we'll be comparing our 53-week fiscal 2016 to the prior year's 52-week fiscal year. These compared results are presented on the chart -- on the charts in our earnings press release, that was published yesterday afternoon. With that, I would now like to turn the call over to Luby's President and CEO, Chris Pappas. Chris?

[Christopher J. 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. We ended the year with positive same-store sales at each of our brands, Luby's Cafeteria, Fuddruckers and Cheeseburger in Paradise, despite what remains a challenging economic environment in our industry for sales growth. Revenues grew year-over-year and our store level profit margins increased, contributing to adjusted EBITDA growth of over 15%. We realized improvements in our expense management efforts with reductions in corporate headcount, travel expenses and store repairs and maintenance costs. We also benefited from lower operating -- opening costs as we pared back our store openings in 2016 and we benefited from lower food commodity and utility costs. In addition, we continued to reduce capital expenditures on an annualized basis, investing $18.3 million in fiscal 2016, compared with $20.4 million last year. Our GAAP earnings in 2016 were adversely impacted by non-recurring and non-cash impairment charges and tax accounting charges. Excluding these non-recurring charges, we realized income from continuing operations of $0.01 per share in the fourth quarter and narrowed our loss from continuing operations by $0.02 per share for the full year fiscal 2016. Adjusted EBITDA grew to $21 million in fiscal 2016, compared to $18.2 million in fiscal 2015. In 2017, we will continue to focus on growing sales and improving profitability. Our ability to generate positive same-store sales and grow EBITDA year-over-year demonstrates the strength of our people, processes and brand even in a tough market. Clearly, there are a number of economic events and indicators that are putting pressure on consumer confidence in this current environment. The market is very competitive with pressures regarding the choice to eat out. There is also evidence of these pressures in the same-store sales results across the restaurant industry landscape, where many have posted negative same-store sales results. However, we believe that our restaurants present great choices for guests with excellent food and value pricing at iconic brands known for quality. We operate in key dining segments of the restaurant space, with deeply loyal guests. We have a positive outlook for the long-term value of our company, which includes sustainable growth of our mature brands, developing our franchisees and culinary contract service segments and effectively managing costs company-wide to enhance profitability. In our Fuddruckers franchise business, we set a record for the number of openings in a single year with 13 in fiscal 2016. Our most recent opening during the fourth quarter was one in the international location in Colombia. There were also six franchise closures during the year. So we added a total of seven net new locations. Fuddruckers is a worldwide brand that continues to grow in popularity, both here in the US and around the world. Our franchise pipeline remains strong and we expect to continue this pace of 13 and more new locations per year in the coming years. I'll now turn the call over to our CFO, Scott Gray to review key financial metrics from the fourth quarter and fiscal 2016. 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 in the Event section. The presentation contains some additional information that we believe will be helpful to investors. Before discussing the financial results, I'm pleased to report that yesterday, the company entered into a new credit agreement, securing financing for the company for the next five years. The $65 million credit agreement is comprised of a $35 million variable rate term loan that amortizes 7% per year or 35% over the five-year term. Second, it includes a $30 million revolving credit facility. The credit facility can be expanded by $10 million to $75 million for future growth. Based on our current leverage ratio, the facility reduces the rate of interest on the company's outstanding debt by approximately 50 basis points. In addition, the credit facility is comprised of three banking partners, as compared to the company's former facility composed of two banks. I would like to thank the entire team, management and the board for their oversight and especially, the new banking partners that have including [ph] in working to reach this deal yesterday. As I present the financial results, I will be covering be covering the quarter and the full year for the majority of the highlights. Beginning with our company-operated restaurants business segment, average weekly restaurants sales in the fourth quarter decreased 2% primarily due to store closures, and to a lesser extent, same-store sales, which were down slightly 0.5%.For the first 52 weeks of fiscal '16, compared to the 52 weeks of fiscal '15, restaurant sales increased by $0.8 million and same-store sales were positive, up 0.7%. Luby's Cafeteria same-store sales were unchanged or flat year-over-year in the fourth quarter versus last year. Traffic was almost up 4% -- up 3.6%, however, and which was offset by lower average spend associated with various product promotion initiatives. For the fiscal year, Luby's same-store sales were up 1.1% or up $2.3 million. Luby's Cafeteria sales averaged 2.6 million per unit in fiscal 2016. Fuddruckers Hamburgers same-store sales decreased 0.8% in the fourth quarter. The 0.8% decrease was the result of a 2.5% decrease in guest frequency, offset by a 1.7% increase in average spend per guest. In our largest market of Texas, where we have 37 company-operated Fudd's, Fuddruckers -- same-store sales at Fuddruckers were positive, up a solid 1%. For the fiscal year Fuddruckers same-store sales overall for all 16 company-operated markets, were flat. Fuddruckers sales averaged 1.5 million per unit in fiscal 2016. Our combo locations same-store sales representing five locations declined 0.3% in fourth quarter and for the fiscal year, Combo's same-store sales were down 1.4%. Combo's sales averaged $3.9 million per unit in fiscal 2016. Cheeseburger in Paradise representing eight Cheeseburger in Paradise locations decreased 3.7% in the fourth quarter. And for the fiscal year, Cheeseburger in Paradise same-store sales were also positive, up 0.7%. Cheeseburger sales on average, averaged $2.3 million per unit in fiscal 2016. Store level profit for the restaurant segment, which we define as restaurants sales plus vending revenue, less cost of food, payroll related cost, other operating expenses and occupancy costs, was $12.9 million or 14% of restaurants sales in this year's 13-week fourth quarter compared to $16.4 million or 14.2% of restaurants sales during the 16-week fourth quarter last year. Food cost benefited from a decline in several food commodity categories, most significantly in beef costs. Food commodity costs in our basket of commodities purchased decreased approximately 3% at Luby's Cafeterias and about 7% at Fuddruckers. As a percentage of restaurant sales, food cost were 28.0% compared to 28.5% in the fourth quarter last year. For the fiscal year, food costs as a percentage of restaurant sales decreased to 28.3%, compared to 28.9% last year. Payroll and related costs as a percentage of restaurant sales increased 1.7% to 35.9% this year in the fourth quarter due primarily related to average -- higher average hourly wage rates, increased scheduling of hourly overtime and the hour -- and hours were driven also by our investments in training and leadership development of team members, as well as higher workers' compensation expense. For the year, as a percentage of restaurant sales, payroll and related costs increased 0.7% to 35.2%. Within our other operating expense line, we have benefited from a lower energy cost translating into lower electricity and natural gas costs to run our restaurants. Additionally, repairs and maintenance, accounted for a large amount of the year-over-year improvement. As a result, our other operating costs improved a 110 basis points in the fourth quarter. For the year, other operating expense costs as a percentage of restaurant sales, decreased 90 basis points of which, about half of that improvement coming from lower repairs and maintenance. On an average weekly basis, store level profit dollars declined 3.4% on a 2.1% decline in average weekly restaurant sales in the fourth quarter, year-over-year. For the fiscal year, on an average weekly basis, same-store profit dollars increased 5% on a 0.2% increase in average weekly sales. Now moving on to our other business segments. In our Culinary Contract Services business segment, revenues decreased to $4 million with 24 operating locations at the end of the quarter compared to $4.4 million, with 23 operating locations at the end of the fourth quarter, due in part to three fewer operating weeks. For the fiscal year, revenue was up to $16.7 million compared to $16.4 million last year. The Culinary segment profit was 12.3% of its sales this year in the fourth quarter, up from 9.8% in the fourth quarter. We continue to exceed our profit targets on a full-year basis of 8% to 10% for this business segment. Turning to our Fuddruckers franchise business segment. Revenue in the quarter decreased 2.2% to 18. -- excuse me, to $1.8 million, compared to last year, in part due to fewer operating weeks. We ended the fiscal year with 113 franchise restaurants, up from a 106 at the end of last year. Overall, as Chris reported, adjusted EBITDA grew to $21 million in fiscal 2016, compared to $18.2 million in fiscal 2015. This increase represents EBITDA growth of 15% year-over-year. We also continue to operate new locations and actively evaluate existing store -- current and historical performance and in 2016, we closed five underperforming stores. In addition, we opened three new Fuddruckers. Including the aggregate losses from stores that closed and one year inefficiencies associated with new stores of approximately $1.5 million in total, our EBITDA was $22.5 million for fiscal 2016. Moving on to the balance sheet, we ended the fourth quarter with a debt balance of $37 million, down from a $37.5 million at the end of last year. During the fourth quarter, our capital expenditures were $3.9 million the same as the fourth quarter and fiscal 2015. For the full year, we invested $18.3 million, a 10% reduction compared to $20.4 million in the prior year. Of the $18.3 million invested, $7.7 million was put towards remodeling our restaurants, eight Cafeterias and ten Fuddruckers were completed. Management is focused on improving margins at our core operations along with a successful execution of our remodeling program, which continues to offer attractive investment returns. We continue to balance deploying capital into our existing and new restaurants, with the growth of our capital-light, Fuddruckers franchise business segment and our Culinary Contract Services business segment. And with that, I'd like to turn the call back over to Chris.

[Christopher J. Pappas:]

Thanks, Scott. Our strategic focus is to generate consistent and sustainable same-store sales growth and improved store level profit. We want our company performance to make it a leader, wherever it operates and in its sector of our industry. We strive to provide attractive returns on shareholder capital. From an operating standpoint, we support this strategic focus through the following

[Christopher J. Pappas:]

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

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.