Luby's, Inc.
Q3 2015 Earnings Call Transcript

Published: 11 Jun 2015

[Operator:]

Greetings, and welcome to the Luby's Fiscal 2015 Third 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 Mr. Steve Goodweather, Vice President of Financial Planning and Analysis. Thank you Mr. Goodweather, you may now begin.

[Steve Goodweather:]

Thank you and again, welcome everyone to Luby's 2015 Fiscal Third 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, June 11, 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 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. 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 third 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 third 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’ll provide comments about our outlook for the business for the remainder of fiscal 2015. The third quarter income from continuing operations was $0.09 per share an improvement of $0.03 over last year. This improvement was driven by growth in combo locations and focused efforts to enhance operations for our guests. From a same-store sales perspective, we experienced a decrease of 1.1% for the total company. Luby's Cafeterias same-store sales declined 1% due in part to adverse weather while Fuddruckers was up 0.2%. As we've discussed previously, we believe that store level profit across all of our brands drives profitability. Our store level profit was 14.8% compared to 15% in the prior year. However, the five combo units that we’re operating for the entire quarter achieved an average store level profit margin of 19.4%, well above the store level profit margin achieved by our legacy standalone restaurants. We continued to focus on operational initiatives to increase guest satisfaction and loyalty, build great leaders at our restaurants, and train and develop our team members to their highest potential. We’re also managing the expenses to maximize our store level profit margin across all of our brands while reducing our G&A expense on a run rate basis. Scott will speak more about these efforts later in the call. Before I turn the call over to Scott, I would like to discuss each of the brands. Luby's Cafeteria, Luby’s same-store sales were up approximately 1% third quarter year-to-date. We continue to focus on our legacy restaurants through operational initiatives that enhance menu offerings and present our guests with everyday value choices. During the quarter we increased menu prices on selected items. We also presented our guest with limited time offers to increase guests frequency. Our average spend per guest and improved in the quarter [10 to 65] (Ph) of $0.28 while remain positioned as the great value in the market we serve. Our strategy at Luby’s is focused on enchanting guest satisfaction through great product offerings efficiently operating in our restaurants and our improving facilities. We're making plans for future remodel efforts in 2016 which we feel are necessary to maintain and improve our pricing power in our markets. We will continue to feature everyday value offers which will help grow traffic counts and build loyal guests. Fuddruckers, we are encourage by Fuddruckers’ positive sales in the quarter and year-to-date. During the quarter we promoted Luke Mandola Junior as our new senior vice president of operations for Fuddruckers. Luke previously served in the role of Director of Leadership development. He understands our service model as well as what it takes to promote a brand and connect and build winning teams. He has extensive experience as an owner and operator of multiple restaurants and has been in the industry for more than 15 years. Our steps to elevate Fuddruckers exposure locally and nationally continue as we are very excited to announce that we signed a new three year partnership program with the national football league team The Houston Texans. We are now the official hamburger of the team. We have partnered with the Texans to combine the thrill of Fuddruckers experience in the game of football. This summer our guest can participate in the contest to name the new signature Houston Texans Burger. Other ongoing efforts will include special offers to Houston Texans’ fans and season ticket holders, media messaging, live radio broadcast like one taking place today and one of our restaurants in Huston and meet and great with cheerleaders and team staff as well as brand involvement in the Houston Texans’ youth football showcase league. In regards to Cheeseburger in Paradise, at Cheeseburger in Paradise we initiated a strategic plan last year to revitalize the brand and improve the results that included closing under proffering units, converting certain locations of Fuddruckers and launching initiatives to improve the restaurant performance at the remaining units. In the third quarter of last year were operating 19 Cheeseburger in Paradise, in this quarter we’re operating eight. We continue to execute on our strategic plan to convert certain of a Cheeseburger in Paradise locations to Fuddruckers restaurants. We have up to three additional conversions set to reopen in the fourth quarter. We’re also in the process of selling two of the closed locations to a franchisee to operators of Fuddruckers restaurant. In regard to our combo units, our six combo locations consisting of our side-by-side Luby’s cafeteria and a Fuddruckers at one location they contributed $6.4 million in sales in the third quarter. This part of our business is operating well and generating higher average unit volumes and our store level profit margins in our legacy restaurants. Our combo location in Jackson, Mississippi that open in the third quarter is outperforming sales expectations which supports our interest in opening the combo restaurants in outer markets. We are actively looking of additional sites in the Southern U.S. regions. To maximize our investment we’re seeking only the most powerful locations in the new markets, where we don’t already have a cafeteria in the market. Our total investment including the land of about $5.5 million, we expect to generate [indiscernible] approximately $1 million in cash flow for operation at store level. In regard to Fuddruckers franchising, our Fuddruckers franchise business continues to be an area of future growth for our company as well, with franchise over 105 Fuddruckers locations currently and our pipeline of future franchise locations continues to expand with 31 U.S. locations and 38 International locations under franchise development agreements. Our newest franchise agreement ranges for the development of three Fuddruckers locations in Virginia and our newest addition to the operating franchise network with the opening of the first Fuddruckers in the State of Maine. Now I would 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 quarter. Before I get started, please note that we’ve posted an investor presentation on our website at lubysinc.com under the Investor Relations Events section. The presentation contains some additional information that we believe will be helpful. I’ll begin with total company results and then cover results by business segment followed by few balance sheet highlights. Adjusted EBITDA was up $0.6 million to $7.9 million compared to $7.3 million in the third quarter of last year on a total sales decline of $2.3 million. Adjusted EBITDA was down $1.2 million year-to-date to $12.1 million compared to $13.3 million. Please refer to Page 11 of our investor presentation for our year-to-year historical EBITDA results. The third quarter fiscal 2015 total company sales decreased approximately $2.3 million or 2.3% year-over-year. This was due to restaurant sales declining $1.2 million, Culinary Contract Services sales decreasing $0.9 million and franchise revenue decreasing slightly by $0.1 million compared to the third quarter last year. This $1.2 million net increase in restaurant sales by brand is as follows. Combo locations were up $2.5 million, Fuddruckers sales up $0.6 million, those were offset by Luby’s Cafeterias down $1.9 million, which substantially was due to some closed locations of $1.3 million. Cheeseburger in Paradise was down $3.3 million of which $2.9 million was from closures. Another way that we look at the change in net decrease in restaurant sales would be to categorized change between new units, legacy units, and closed restaurants and is as follows. New restaurants were up $4.6 million driven by combo locations, legacy stores were down slightly $0.5 million partially due to weather and sales declines of $5.4 million were due to store closures and $2.9 million was from Cheeseburger’s where we have the units to be converted, franchised or sold and $1.3 million from cafeterias three locations which were sold for debt reduction and one lease expiration and $0.9 million from Fuddruckers where we have one sold for relocation and one available for sale and two lease expirations. And then also we have $0.3 million which related to one Koo Koo Roo restaurant location which we have since converted and reopened that as a Fuddruckers in California in the current quarter. The takeaway here is that we’re replacing older lower performing units with newer restaurants. For bridge showing the components of our change in restaurant sales please see Page 26 of our investor presentation for more information on our sales volumes by unit type see Pages 29 and 30 in our investor presentation. Food cost in the third quarter decreased $0.5 million year-over-year, in the long-term however we will continue to evaluate and take measured price increases over time and with some more frequency to maintain and improve margins. During the third quarter, payroll on related cost increased $0.2 million reflecting an increase in restaurant management cost. Payroll cost as a percentage of restaurant sales was 34%, which is 33.3% at third quarter of last year. New unit openings contributed to the basis point increase during the quarter, we continue to work to optimize our labor deployment. Other operating expenses decreased 3.3% year-over-year, due to utility cost, marketing, and advertising costs and insurance cost, these decreases were partially offset by higher repairs and maintenance costs supplies and service cost. Operating expenses as a percentage of restaurant sales decreased slightly to 17.4% this quarter versus 17.7% in the third quarter of last year. Now moving on to some total company expenses, general and administrative expenses decreased by $1 million or 12.3% year-over-year primarily due to lower compensation expense and lower professional services fees. This reflects our focused efforts to manage expenses and reduce our run rate. We have completed a number of projects related to corporate and technology functions and now can manage many of these items internally without the need for external consulting thus lowering expenses. And as Chris mentioned, we’ve also taken actions in the fourth quarter to reduce corporate headcount and going forward we expect to save approximately $1 million on a full-year run rate basis. These corporate headcount reductions were in non-customer facing areas that we determined would not hamper our ability to support and grow our business segments. Moving to other business segments, we ended the third quarter of fiscal 2015 with 21 locations in a Culinary Contract Services, revenue in this segment decreased $0.9 million as I mentioned that was due to five fewer locations operating in the third quarter compared to last year. Two of these were our larger sales volume locations reaching the end of their multiyear terms. While the revenue declined $0.9 million as a result of these contracts reaching their yearend dates, the profit margin and the business line overall declined only 24,000. Further, Culinary margin remains well above the 8% to 10% target margin that we set and we continue to have, an encouraging pipeline of anticipated future new culinary agreements. In our Fuddruckers franchisee business segment, revenue totaled $1.6 million in the third quarter, a decrease of approximately $0.1 year-over-year. Within our Fuddruckers franchise network, there was one permanent closure and one temporary closure of a restaurant that we’ll reopen in the location later this summer. As we’ve continued to add development agreements to our pipeline for future Fuddruckers franchise locations, our balance sheet reflects $1.7 million in deferred franchise revenues outstanding as of May 6, 2015. We expect to recognize these amounts as new franchise units opened over the coming years as franchise fees revenue in accordance with our expected franchise development agreements. Moving on to our balance sheet, in the third quarter, we paid down net pay down of approximately $6.5 million of our revolving credit facility and had $5.4 million in capital expenditures in the quarter, keeping us on pace to achieve our reduced capital expenditure total for the year of approximately $20 million to $22 million. And to conclude, our long-term investment strategy and capital allocation strategy remains focused on balancing the capital, intensive investments, and new restaurant development with a low or no capital investment from our culinary contracts business and Fuddruckers franchise business segments. We will continue to reinvest in our existing restaurants as they generate much to the company’s cash flow and manage our debt. Thank you and with that I’ll turn the call back over to Chris.

[Christopher J. Pappas:]

Thanks, Scott. Growing sales, guest loyalty and team member loyalty along with effective expense management are the drivers that lead to expand in our company, improving profitability and enhancing share holder value. Over the next 24 months, we expect to sell some excess real estate and redeploy over 15 million in estimated net proceeds into new remodeled programs, new units and debt reduction. We also have reduced our overall marketing and advertising spend to a level we effectively communicate with guests for maximizing the value we get out of these efforts. We remain focused on improving our operating income across all of our restaurant brands through dedicated efforts to continually enhance our product offerings and provide some superior service to our guest. Our entire team is focused on improving sales and profitability through efficient store cost management and G&A management. In addition, we continue to focus on store level performance initiatives and modest price adjustments on selected menu items to build our share holder value. Operator, we are now ready for questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. At this I would like to turn the conference back over to Mr. Pappas for any closing comments.

[Christopher J. Pappas:]

Well, thank you, operator. We understand that the underlying value of our brands and product is driven by the hardworking and dedication of our employees and we remain focused on providing them with the support, resources and training to be the best they can. I would like to thank you all for joining us today and we look forward to speaking with you again next quarter.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.