Luby's, Inc.
Q1 2015 Earnings Call Transcript

Published: 18 Dec 2014

[Operator:]

Greetings and welcome to Luby's First Quarter 2015 Earnings Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded. At this time I would like to turn the call over to your host today, Steve Goodweather, Vice President of Financial Planning and Analysis. Thank you sir you may begin.

[Steve Goodweather:]

Thank you. And again welcome everyone to Luby's 2015 fiscal first 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, December 18, 2014. 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, and seasonality of the company's business, taxes and 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. I will now turn the call over to Luby's President and CEO, Chris Pappas.

[Christopher J. Pappas:]

Thanks, Steve. Good morning, everyone. And thank you for joining us on our first quarter earnings conference call for fiscal 2015. With me today are Scott Gray, our Chief Financial Officer; and Peter Tropoli, our Chief Operating Officer. I would like to begin today’s call by providing an overview of our first quarter. I’ll then turn the call over to our CFO, Scott Gray to review the financial highlights from the quarter and then before opening the call to your questions I will provide comments about our outlook for the business in fiscal 2015 In regard to quarter one we are pleased to report total revenue growth this quarter in each of our business segments; Company-owned Restaurants, Culinary Contract Services, and Franchise Operations. We also achieved same-store sales increases at our Luby’s Cafeterias, Fuddruckers and combination Luby’s-Fuddruckers side-by-side restaurants. As a reminder our first quarter has historically been a seasonally weaker quarter with lower guest traffic in the period after the start of school but before the Thanksgiving holiday. From a profitability standpoint we are focused on improving our store level profit to drive EBITDA growth by maximizing operational excellence at both of our legacy and new restaurants across all brands. Our team is working hard in fiscal 2015 following a number of challenges from 2014. One, we achieved record setting new restaurant expansion in 2014, marking the most new restaurants opening we've had since the 1990's. While we believe this has and will continue to be a sales growth driver it also represents a temporarily drag on bottom line profitability. We are continuing to work through these expense pressures and expect to see improvements through 2015. Our restaurant expansion in fiscal 2014 set a good foundation for increasing total company cash flow. Two, additionally we underwent a brand re-positioning strategy at Cheeseburger in Paradise that we believe will enhance our financial performance. However this move also takes some time to cycle through these closed units and the conversions of several restaurants into the Fuddruckers brand. Third, the final challenges we are working through fiscal 2014 which will still exist in 2015 are the continued macro headwinds for the restaurant industry that include higher food commodities, consumer confidence issues and spend challenges as well as our slow growth economy. Of course we are encouraged by the recent slide in gas prices, which certainly can help our guest pocket books and their frequency of dining visits. From a new store development standpoint we are moderating the pace of our restaurant expansion compared to the record pace of fiscal 2014. While we will develop and open fewer restaurants in fiscal 2015 we are expanding our footprint by entering into new and under-represented markets as well as growing our franchise network and Culinary Contract services business. We opened two new company owned Fuddruckers restaurants already in the first quarter of fiscal 2015; one in Brandywine, Maryland and one in El Paso, Texas. Within our franchise system we saw one franchise location open in North Dakota as well as the first Fuddruckers to open in Panama. And then earlier this month in our second quarter we opened a Fuddruckers in New York Delaware that we converted from a Cheeseburger in Paradise location and one of our franchisees opened the first Fuddruckers in Chile. In total we've seen six Fuddruckers restaurants open so far this year. Construction of our new combo unit location in Jackson, Mississippi is nearing completion and is expected open in the early spring. We also began operations at two new Culinary Contract Service locations, one in Greensboro, North Carolina and one in Houston, Texas. Today we operate 26 Culinary Contract Service locations compared to 21 at the end of the first quarter of fiscal 2014. As we discussed in the past we believe the combination Fuddruckers-Luby’s combination to be a good growth engine for the company and our brands. These locations consist of the side-by-side Luby’s and Fuddruckers. And they offer us the ability to maximize operational effectiveness over time, while also introducing our brands to wider cross-sections of our guests. We continue to receive positive guest feedback from Fuddruckers customers that are now discovering the excellent offerings of our Luby’s brand and vice-versa. In the first quarter our five combination locations contributed 6.3% to our total restaurant sales. These locations in the aggregate are meeting our sales expectations and represent a strategic growth driver for our company. Now I'd like to turn the call over to Scott Gray who will elaborate on our financial results and then I'll comment on our 2015 outlook before opening the call up to your questions. Scott?

[K. Scott Gray:]

Thank you, Chris. This morning I'll elaborate on our financial performance for the first quarter 2015. Before I get started please note that we posted our typical investor presentation on our website at lubysinc.com under investor relations in the events section. The presentation contain some additional information we think is helpful. I'll begin with our total company results and then cover results by our business segments followed by few balance sheet highlights. Adjusted EBITDA, defined as total company EBITDA, excluding Cheeseburger for the trailing four quarters was $17.1 million or 5% of total sales, which is after deducting $2.7 million in trailing four quarters opening cost. Ajusted EBITDA for the quarter was $1.4 million or 1.6% of total sales compared to $4.5 million or 5.2% of total sales last year. Please refer to page 11 on our investor pack on the website for our year-to-year historical EBITDA results. The first quarter of fiscal 2015 total sales, total restaurant sales increased $600,000. The net increase of $600,000 was a result of one, new stores that as we say, stores that we’ve opened since fiscal 2012 and the same store sales increase of Luby’s and Fuddruckers contributing $6.1 million to the year-over-year sales increase, partially offset by the increase in sales due to decrease in sales from closure of 17 stores which reduced sales $5.2 million and an additional $250,000 reduction in year-over-year sales at the eight remaining Cheeseburger in Paradise restaurants. For a bridge showing the components of our restaurant sales growth please see page 26 in our investor presentation and for more information on our sales volumes by unit type see pages 29 and 30 in our investor pack. For the first quarter we realized a loss from continuing operations of $2.8 million or $0.10 per share. Excluding special items our loss from continuing operations was $2 million or $0.07 per share. This decline in earnings was the result of cost pressures impacting store level profit in addition to the higher opening cost, depreciation expenses and interest expense related to our restaurant growth activities. Store level profit margin for the restaurant segment decreased from 11.4% in the first quarter last year to 9.1% in the first quarter of fiscal 2015. Food cost were negatively impacted by an 11% increase in our basket of food commodities purchases at Fuddruckers and 5% increase at Luby’s Cafeterias. Contributing to much of the increase in food cost was a greater than 25% increase in beef cost at our Fuddruckers restaurants compared to the prior year. The 120 basis points increase in payroll related cost reflected elevated levels of staffing at our new restaurant openings, increased training hours and increased staffing at our Fuddruckers restaurants as well as higher health insurance cost. The increased staffing at Fuddruckers is associated with our initiatives to enhance guest service. Higher health insurance cost also increased the payroll related cost as we mentioned a moment ago about 0.2% as a percentage of restaurant sales. Other operating expenses increases included higher repairs and maintenance, restaurant supply cost, travel and utility cost. The travel cost increase was in order to support new store openings in the quarter. Increases were partially offset by lower restaurant service cost and lower royalty payments as we ceased operations at a number of Cheeseburger in Paradise locations compared to last year. Our opening costs in the quarter were $900,000, an increase of $600,000 compared to last year. About half of this expense line included the carrying cost for six closed Cheeseburger in Paradise locations that are in various stages of conversion to Fuddruckers. Moving on to our other business segments, Culinary Contract Services continues to grow in a number of locations serviced. Two new Culinary locations opened in the first quarter, one in Huston and one in Greensboro, North Carolina. We closed the Fuddruckers restaurant in Greensboro around same time and we started service at a Culinary location. This conveniently allowed for us to keep our brands presence in the market and also offered an opportunity to redeploy some team members into another segment of our business. Segment profit for Culinary Contract Service segment grew to over $600,000 in the first quarter, at a profit margin of 14.1%. Our Fuddruckers franchise business segment also grew franchise revenue by 4.4%. Half of the increase reflects increased royalty revenue and half reflects franchise fees we earned when franchise owners opened stores under their development agreements. Please see our investor pack for a full list of the development agreements that we signed for Fuddruckers. Moving on to the balance sheet we ended the first quarter with $48.3 million in debt compared to $42 million at the start of the fiscal year. The increase in our debt balance primarily reflects utilization of our credit facility to make investments in new unit development and to fund our operations. As stated in our last two earnings releases we plan to reduce our capital expenditures in the current year as we work on increasing cash flow from operations to fund capital investments. Our total capital expenditures for fiscal 2015 will range from $20 million to $25 million as we previously stated. This is significantly reduced from prior years as we balance the pace of growth with the need to maintain debt balances at acceptable levels and to finance our capital investments largely from cash flow and partially from sale of assets. As of the end of the quarter our book value per share was at $5.96 per diluted share. To conclude I reiterate our long-term investment and capital allocation strategy remains unchanged. We seek to balance the capital intensive investments and new restaurant development with the low or no capital investment from our Culinary Contract business and Fuddruckers franchisees business segment. We seek to reinvest in our existing restaurants as they generate much of the cash flow that supports our development of new restaurants, which offer an opportunity for higher investment returns. All of our investments are carefully consider maintaining an appropriate level of financial leverage on the company. And with that, I'd like to turn it back over to Chris.

[Christopher J. Pappas:]

Thanks, Scott. The Luby’s leadership team and Board are confident in our business initiatives, our brands and the talented and experienced team members we have across our company. As we have discussed following a record year of new openings in fiscal 2014 the team’s focused on enhancing store level profit margin that will drive EBITDA growth and shareholder value. In fiscal 2015 we are focused on improving store level profit at our new restaurants while also enhancing our profitability at our core brand legacy locations. While we expect commodity cost pressures to increase in certain categories we continue to implement and manage store-level initiatives to enhance efficiency and we will make menu price adjustments while maintaining our value proposition. Our goal is to maintain the positive same-store sales trends at Luby’s Cafeterias and Fuddruckers in fiscal 2015 compared to fiscal 2014. As always we remain determined to grow and improve our brand’s financial performance through serving our guests and meeting their expectations on each of their visits. For Luby’s this is the path to improving profitability and enhancing shareholder value overtime. Finally, let me just say as a shareholder and a large shareholder I am not pleased with our current share value. However I continue to have confidence in our strategy and path towards long-term shareholder value. Operator, I would like to open up the call to any questions.

[Christopher J. Pappas:]

Thank you, operator, and thank you all for joining us today. We appreciate your interest and support in the company and hope you all have the opportunity to dine in one of our brands in the future. We wish you a happy holiday season and look forward to speaking with you again at our next 2015 conference call. Thank you.

[Operator:]

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.