Luby's, Inc.
Q2 2015 Earnings Call Transcript

Published: 23 Mar 2015

[Operator:]

Greetings, and welcome to the Luby's Fiscal 2015 Second 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] I would now like to turn the conference over to your host Steve Goodweather, VP for Financial Planning and Analysis. Thank you. You may now begin.

[Steve Goodweather:]

Thank you. Again, welcome everyone to Luby's 2015 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, March 23, 2015. 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, 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. I will now turn the call over to Luby's President and CEO, Chris Pappas.

[Chris Pappas:]

Thanks, Steve. Good morning, everyone. Thank you for joining us in our second 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 second quarter. I will then turn the call over to our CFO Scott Gray to review the financial highlights from the quarter. Then before opening the call to questions, I will provide some comments about our outlook for the business in fiscal 2015. Overall, we are pleased with our same-store sales results in the second quarter with total company same-store sales up 2.5%. Luby's same-store sales were up 3.1%, Fuddruckers were up 2.1%, and our first combo unit was up 2.4%. If we were to take out the favorable year-over-year benefit from weather, we estimate same-store sales would still be up approximately 1.6%. That is based on a weather benefit adjusted increase of 2.4% at Luby's Cafeteria, and 0.3% at Fuddruckers. While we are not pleased to report a loss from continuing operations of $0.04, we are trending in the right direction with our sales and other measures to improve profitability. There are several macroeconomic factors that were favorable in the second quarter and should represent positives for the restaurant sector, and we believe for our brands including a slightly improving economy, slowly rising employment levels and lowered gasoline prices, will affect us. From a profitability standpoint, we are focused on improving our store level profit to drive EBITDA growth by maximizing operational excellence at both our legacy and new restaurants across all brands. Our total company store level profit was 11.1%; however, our combo units taken together achieved a store level profit margin of 19.1% in the second quarter. This is well above the store level profit margin achieved by our legacy standalone cafeterias and legacy standalone Fuddruckers. Furthermore, we hope to see an upside potential to the combo profit margin as we continue to grow sales and effectively manage operating costs at these locations as the team there gains more experience. We continue to focus on operational initiatives to increase guest satisfaction and loyalty, to build great leaders at our restaurants, and trying and develop our team members to their highest potential. Looking at performance by brand, our core brands of Luby's and Fuddruckers are gaining momentum with both achieving increased same-store sales in the quarter. In addition, these brands are benefiting as part of our new combo unit locations, which now represent 5.8% of restaurant revenues in the second quarter compared to just 1.8% in the prior year quarter. We continue to believe that these combo units represent an attractive growth potential for the company. The combo units also strengthen both of the individual brands and achieved strong results together while also reaching a broader cross-section of customers. At Cheeseburger in Paradise, we initiated a strategic plan last year to revitalize the brand and improve results that included closing underperforming units, converting certain locations to Fuddruckers, and launching initiatives to improve restaurant performance at the remaining units. We are now on a path toward improving the brand and enhancing these assets. I would like to thank all of the employees for their efforts and continue to encourage them to meet the high internal goals we set for ourselves to achieve success. From a marketing perspective, we have recently shifted to a greater use of email blast and targeted short-term duration limited time email offers while reducing some of our direct mail efforts. While both avenues represent productive ways to reach our guests, we are currently finding the new media avenues to be a particularly cost-effective portion of our marketing strategy. In the second quarter, we opened a Fuddruckers restaurant in Newark, Delaware, which we converted from a Cheeseburger in Paradise restaurant. We also announced new franchise agreements to open Fuddruckers restaurants internationally in South America, in the country of Columbia. Domestically, in Central Florida, also by summertime this year, a new Fuddruckers' franchise will open in the state of Maine, and I am excited to let you know that on February 18, we have opened our first combo location outside of Texas, representing our sixth combo location to-date. It is located in Jackson, Mississippi, and we are very pleased with the positive reception we have received during the period of wintry weather in this usually mild climate. The store opened with a lot of fanfare and with the support of all the local dignitaries. This community is truly embracing what we call the Luby Way and Fuddruckers world's greatest hamburger. We are thrilled to be there. The first day and the first two weeks have broken all sales records for combo opening to-date. Now I would like to turn the call over to Scott Gray, who will elaborate on our financial results and then I will comment a little on 2015 outlook before opening the call up to your questions. Scott?

[Scott Gray:]

Thanks, Chris. This morning, I will elaborate on the financial performance for the quarter. Before I get started, please note that we have posted our usual investor presentation on our website at lubysinc.com under Investor Relations, in the Events section. The presentation contains some additional information we think is helpful, and I will try to reference it through my comments. I will begin with total company results and then cover results by business segment followed by a few balance sheet highlights. One point, we like to start off with is to refer to our adjusted EBITDA, which we define as total company EBITDA excluding Cheeseburger and opening cost for the trailing four quarters. Ending the second quarter 2015, our adjusted EBITDA was $19.3 million or 5.2% of total sales excluding Cheeseburger. This compares to $26.3 million or 7.4% for the trailing four quarters as of the second quarter ended last fiscal second-quarter 2014. Our adjusted EBITDA for this quarter was $4.3 million, representing 4.9% of total sales compared to $4.8 million or 5.8% of total sales in the second quarter last year. Please refer to Page 11 of our investor pack for our year-to-year historical unadjusted EBITDA results. For the second quarter, we realized a loss from continuing operations of $1.2 million or $0.04 per share. That is also excluding special items, which compares to income from continuing operations of $300,000 or $0.01 per share in the second quarter last year. This quarter's $0.04 loss per share this quarter versus last year's income of $0.01 per share is due to the swing in income taxes year-over-year of a $0.05 per share benefit in the prior year and then a small provision in income taxes this year in the second quarter. Store level profit defined as restaurant sales less cost of food payroll-related costs other operating expenses in occupancy costs was $9.5 million or 11.1% of restaurant sales in the second quarter fiscal 2015 compared to $9.4 million or 11.3% of restaurant sales in the second quarter last year. In addition to improving store level profit only slightly on higher sales, which were substantially offset by food, commodity costs increases and other expenses, our P&L results are recently burdened with higher opening costs, higher depreciation expense and interest expense over the prior year as a result of our recent new unit growth. The net increase in these line items impacted pre-tax income in the quarter by $600,000 $0.01 on an after-tax basis per share in the quarter or $2.1 million in higher aggregate opening cost depreciation and interest expense or $0.05 per share after-tax for the two quarters ended. For the second quarter fiscal 2015, total company sales increased approximately $2.4 million or 2.7% year-over-year. This was due to restaurant sales increasing by $2.6 million. Culinary Contract Services sales decreased $200,000 and franchise revenue increased about $60,000 compared to the second quarter last year. This $2.6 million increase in restaurant sales included the sales increase at combo locations of $3.4 million, a sales increase at Fuddruckers restaurant of $2.2 million and a sales increase at Luby's Cafeterias of the $300,000. The new restaurants defined as sales that we have opened since 2012, contributed $5.7 million to the year-over-year sales increase. In addition, legacy stores contributed $2 million to the year-over-year sales increase and those were offset by $5.1 million decrease in sales from the closure of stores over the prior period, which included a nine Cheeseburger in Paradise locations. For a bridge showing the components of our sales growth, please see Page 26 on our investor presentation, and also for more information regarding our average weekly sales by unit refer to pages 29 and 30 in our investor pack. Food cost represented the greatest cost pressure in the quarter, increasing 80 basis points compared to the year ago quarter. Food costs were negatively impacted by a 12% increase in our basket of food commodity purchases at Fuddruckers and 7% increase at Luby's Cafeterias. In an effort to recover a portion of the higher food input costs that we are facing, we implemented approximately 1% price increase near the end of the second quarter both, of our core brands Luby's and Fuddruckers. We will continue to take measured price increases over time with some frequency going forward, particularly in his current macroeconomic environment to improve our store level profit margins. During the quarter, payroll related costs increased by $600,000, primarily due to an increase in restaurant management costs designed to enhance the store execution and the guest experience. However, our payroll cost as a percentage of restaurant sales decreased by 40 basis points year-over-year, primarily reflecting efforts at optimizing deployment, mix of crew and management team members as well as fewer store openings where excess staff is generally necessary. Other operating expenses increased by 3.1% year-over-year, due to higher repair and maintenance costs, higher marketing expense and higher restaurant supplies costs. These increases were partially offset by lower utility and insurance cost. Although higher on an absolute basis, other operating expenses as percentage restaurant sales were unchanged at 18.6% in the second quarter this year and last year. Moving on to our other business segments, Luby's Culinary Services' revenue decreased by $200,000, primarily due to the change the mix of locations and clients we serve. Culinary margin before G&A other expenses was 11.7% compared to 12.1% last year in the second quarter. For our franchise business segment, please refer to Page 18 in our investor pack for listing of the franchise sales activity. Today, we sold 76 locations. As of February 11, 2015, we had $1.2 million and deferred franchise revenues outstanding on our balance sheet. We expect to recognize this amount as new franchise units open over the coming years, as franchise fee revenues in accordance with respect to franchise development agreements. Moving on to the balance sheet, we ended the second quarter with $54.5 million in debt compared to $42 million at the end of fiscal 2014. The increase in our debt balance primarily reflects utilization of our credit facility to fund our annual property, our tax payments, as well as finance new unit development underway and to fund operations. As we have mentioned over the previous few quarters, we plan to reduce our capital expenditures as we work on increasing cash flow from operations to fund capital investments. Capital expenditures for the first two quarters of 2015 were approximately $11 million, and we now expect our total capital expenditures for 2015 to range from $20 million to $22 million. Please refer to Page 32 in our investor pack for more detail on CapEx. This has significantly reduced from the prior year 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. We do anticipate proceeds from the sale of assets to be utilized in reducing our outstanding debt or to be redeployed into new assets for the company forward. To conclude, our long-term investment strategy and capital allocation strategy remains focused on balancing the capital-intensive investments in the restaurant development, along with the low- and no capital investment option from our Luby's culinary services and Fuddruckers franchise businesses. We will continue to reinvest in our existing restaurants as well as they generate much of the company's cash flow. With that, I would like to turn the call back over to Chris.

[Chris Pappas:]

Thanks, Scott. While the macroeconomic factors continue to improve, we continue to experience commodity cost pressures in certain categories, especially beef. Our teams are going to continue to work hard to work and manage these pressures at the store level. As Scott discussed, we will make some modest price adjustments to cover inflationary trends in our input costs, while always maintaining our value-oriented position. We expect same-store sales and guest traffic growth at our core Luby's and Fuddruckers brands in 2015, and we expect to continue to development our team, improving efficiencies at our six combo locations, as well as see new openings within our franchise network. We have a talented and dedicated employee, staff working hard every day throughout the country in our restaurants, and we are thankful for their continued service. Our team is focused on growing store level profit margins, guest traffic, and increasing profitability to grow our shareholder value in the long-term. With that operator, we would like to open up the call to questions.

[Operator:]

Thank you. At this time, we will be conducting a question and answer session. [Operator Instructions] Our first question comes from James Fronda from Sidoti & Company.

[James Fronda:]

Hi, guys. How is it going?

[Chris Pappas:]

Hi, James.

[Scott Gray:]

Hi, James.

[James Fronda:]

Could you just remind me again, what was the combo store-level profit margin this year compared to last year?

[Scott Gray:]

We are proud to say 19%.

[James Fronda:]

Okay. That was up from what?

[Chris Pappas:]

Last year was much fewer combos.

[James Fronda:]

Right.

[Chris Pappas:]

Last year in the second quarter, I believe it was approximately right around the same level, but we have more stores, it’s six open today's, so it is about double the number of stores opened in the quarter.

[James Fronda:]

Right. Okay. I guess, with remodeling you did, is there any range in terms of future same-store sales growth that you expect going forward? Is your sales growth in general from the remodeling that you have done?

[Chris Pappas:]

We have seen remodels as a catalyst for the stores, in particular stores that may have been on the decline, reducing the likelihood of that decline in sales. We will continue to do remodels as we go forward based on what we can afford with our capital plan. We have slowed that down into 2015, but we have seen good results in the past.

[Scott Gray:]

…3% to 5% usually for the first two years.

[James Fronda:]

All right. Okay. Is there any, I guess, big picture number or idea you guys can give me in terms of cost savings on the operating side, you guys can achieve for this year or just the back half of this year?

[Chris Pappas:]

I would say what we are trying to do this year is try to come in, try to get our margins up a little bit to improve year-over-year results. Last year was the first year in the number of years that we swung to net loss for the year. This year kind of reflected in our estimates I mentioned the kind of swing from a tax benefit last year to kind of flat this quarter and that is with the belief that we are kind of at more of a breakeven level forward for this year.

[James Fronda:]

Okay.

[Chris Pappas:]

To see as it develops in the third quarter, that is a big part. Our business really picks up in the third quarter, but currently that is what is implied. We hope that this is a good time to start taking some price. I mean, obviously, you can see that our food commodities have significantly been impacted into the margin on our business, but we are positioned in certain spot with our brands and we want to protect that position for the customer, so.

[James Fronda:]

Okay. That makes sense. Thanks, guys.

[Chris Pappas:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] It appears there are no further questions. I will turn the call back over to our CEO, Chris Pappas.

[Chris Pappas:]

Thank you, operator, and thank you all for joining us today. We appreciate your interest in Luby's and hope you all have the opportunity to dine at one of our brands shortly now or in the future. We look forward to speaking with you again next quarter, expected in the mid-June range. Thank you.

[Operator:]

Thank you. This does conclude today’s teleconference. You may disconnect your line at this time. Thank you for your participation.