Luby's, Inc.
Q3 2013 Earnings Call Transcript

Published: 13 Jun 2013

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Luby's Third Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, June 13, 2013. I would now like to turn the conference over to Steve Goodweather, Vice President of Financial Planning and Analysis. Please go ahead.

[Steve Goodweather:]

Thank you. And welcome, everyone, to Luby's 2013 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. The information recorded on this call speaks only as of today, June 13, 2013. 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, 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 2013 fiscal third quarter earnings conference call. With me today are Scott Gray, our Senior Vice President and CFO; and Peter Tropoli, our Chief Operating Officer, also. The third quarter, which ran from February 14, 2013, to May 8, 2013, saw an improvement in our same-store sales comp compared to the previous quarter. Our third quarter sales comp was basically flat, at negative 0.1%. Our previous quarter, that is our second quarter, our same-store comp was negative 0.6%. So this represents about a 0.5% improvement in the sales comp, moving from the second quarter to the third quarter. Total restaurant sales grew by $13.7 million year-over-year. $11.4 million of the sales came from the acquired 23 Cheeseburger in Paradise restaurants, and the balance was from net restaurant unit growth. We generated income from continuing operations of $2.6 million, or $0.09 per share, compared to $2.5 million or also $0.09 per share in the same quarter last fiscal year. Before I report on results and initiatives, I wanted to touch on new unit growth. Year-to-date, we have opened 1 new Luby's and 6 Fuddruckers. But more importantly, our pipeline for new restaurant development is growing. We have 3 new Luby's under construction. One is a relocation of a nearby existing unit in South Texas, which will be reopening by the end of the month. Next, we have 2 more locations that are currently under construction. One is a Cafeteria, and the second is a side-by-side Luby's and Fuddruckers, similar to the one we opened in Pearland, Texas at the start of fiscal 2013. These 3 restaurants are all located in Texas markets. We're also in the late-stage permitting process for 2 freestanding Fuddruckers restaurants in Texas. In total, including the units above, we now have a pipeline of 12 restaurants, most of which should be open before the end of our fiscal year 2014. Six of these will be side-by-side Luby's and Fuddruckers developments at 3 locations. As we evaluate each of these models, we believe each has a place in our growth strategy and can generate appropriate returns on investment. We currently believe the side-by-side configuration is a vehicle for a good portion of our near-term growth. We see excellent opportunity to expand our brands, and now we have built some momentum to deliver more units each year. Now let's move on to a quick review of our brands. Let's start with our Luby's Cafeteria. Our new $5.99 daily manager's special had a successful introduction. These are largely new items provided at a favorable food cost as a percentage of sales. The program has tangibly helped us improved our guest traffic versus the trend prior to their introduction. We're also seeing strong increases in our net promoter scores and believe these value offerings are a component of success in this area. Our remodeling program continues to contribute to improved results at our cafeterias. A number of our restaurants are well over 20 years old. We wanted our guests to have a great experience when they come to one of our locations. That includes enjoying the atmosphere and freshened decor. Fiscal 2013 year-to-date, we've remodeled or substantially completed the remodel of 11 Cafeterias. And by fiscal year end, we expect to complete 12 Luby's remodels. Last fiscal year, we completed 12 Cafeteria remodels, of which 8 were more extensive than others. Results so far have been positive with traffic increases of at least 3% above where the stores were trending prior to their remodels. We're also developing new sales and leveraging our fixed operations through catering. Catering now represents more than 1% of our sales volume and continues to grow. We've launched a grab-and-go program where our guest can pick up prepackaged baked goods to take home with them. These items are attractively displayed and motivating some add-on purchases. Chocolate chip cookies always are a big seller as well as pies around the holidays. We view these as incremental sales. Our goal is for grab-and-go items to contribute about 0.5% to same-store sales. We also successfully introduced our Livin'Smart program. These are specifically designed healthier offers -- offerings with full meals under 600 calories. This also represents about 1% of our sales volume but important to a growing segment of our customers, and a great way to generate frequency and loyalty. We continue to listen to the needs of these guests and build this program based on their feedback. As far as traditional marketing is concerned, we are continuing with the programs we launched last quarter, including our newspaper inserts, direct mailing, TV ads on targeted cable stations and billboards to communicate key messages. Now moving on to Fuddruckers. We continue to find opportunities to enhance our guest experience with driving to increase the accuracy and speed of our service. Our objective is to consistently serve a made-to-order hamburger in 7 to 10 minutes. We continue to roll out the kitchen display monitors into the restaurants. These help us to more accurately build our orders and monitor these ticket times. We continue to closely monitor our customer comments provided by our new survey called On The Spot QR Codes based on our -- the comment program. As evidenced by our customer surveys and improving net promoter scores through the course of the quarter, our customers are noticing the efforts put forth by our frontline management and their teams. We'll also be engaging each of our team members to add to the customers' experience. Currently, we're expanding an incentive program that was successfully piloted, where our cashiers are making helpful suggestions on additional menu items, which is also increasing average customer spend slightly. We've remodeled 6 Fuddruckers year-to-date. We've also completed full restroom remodels at 11 of these Fuddruckers locations. We're also working to expand our franchise network. We have 23 units in the franchise agreement pipeline, including 6 in South Florida, 2 in Omaha, 5 in North Dakota and up to 10 in Panama and Aruba, and we're speaking to many other potential franchisees. Now I'd like to update you on our progress integrating and enhancing our newly acquired Cheeseburger in Paradise operations. As we mentioned on our last conference call, we're approaching Cheeseburger in Paradise in a similar manner as we did Fuddruckers. Number one, we're enhancing the level of operations and service; two, upgrading the menu; three, realizing efficiencies and to improve our margins. Site year-over-year sales at Cheeseburger in Paradise have been challenged and below expectations so far. Comp sales during the quarter for Cheeseburger in Paradise were down 13%. While this brand sales are not yet same-store sales, we're mindful of this development. We attribute a portion -- a large portion of this decline in comp sales for Cheeseburger in Paradise in the quarter to prior year promotions not fully repeated this year for the whole quarter. But as you know, integrations take time. As we launch new restaurant processes, our teams will move up the learning curve. Sometimes, those curves are steep. But as we gain traction, we believe that the changes we're making will result in significant improvements and pay off in the long term. We're actively proceeding with our integration and operational improvements with the brand. We're excited to inform you that we've already launched a new and improved hamburger patty at the operations and a premises baked-on bun, which has been tested and well received by our guests. By the end of the third quarter, all Cheeseburger in Paradise locations we're buying from our food distribution network. The transition went well. And now, as our team gains experience with the Orange system, our processes should begin yielding enhanced product consistency and a better cost as we move forward. As far as marketing, we've launched or relaunched traffic diving initiatives, including a happy hour at the brand, family nights with free kids meals and promotions surrounding sporting events. Our Burger Up promotion is generating some buzz as guests are encouraged to submit their own burger and drink creations. The winning creation will wind up on our menu. To further tie the restaurant to the local market, we're developing a brand ambassador program for the Cheeseburger in Paradise restaurants. This program, which is similar to what we are now doing at Luby's and Fuddruckers, identifies individuals in the restaurant who have strong customer engagement skills. These individuals are then able to devote a portion of their workweek getting feedback from customers as -- and also to get outside the restaurant in its local community to generate interest and knowledge about all the offerings and excitement of their nearby Cheeseburger in Paradise restaurant. In summary, at Luby's Inc., we have a plan for growing each of these concepts and enhancing shareholder value. This involves building new restaurants in carefully selected locations, including relocating in certain circumstances. It involves a disciplined remodeling program. It keeps all of our restaurants fresh looking and relevant to our guests. It includes deploying appropriate measurement tools to improve margins at existing restaurants as well as a focus on generating operation and performance improvements. Our growth includes working with existing and potential franchisees for opportunities to expand the Fuddruckers brand into new markets domestically and internationally. We're also constantly seeking new opportunities with our Culinary Contract Services business line in each of our restaurant brands. Now at this time, I'd like to turn the call over to Scott Gray to elaborate on some of our financial results. Scott?

[K. Scott Gray:]

Thank you, Chris, and good morning, everyone. I will elaborate on our restaurant segment results with details at the brand level, touch on a few highlights on our franchise and Culinary Contract business segments as well as discuss our balance sheet, cash flow statement, and wrap up with an update on our annual sales and EPS outlook. I'll begin with walking through the components of our total restaurant sales year-over-year for the quarter. Total restaurant sales grew 17.5%, or $13.7 million, to $91.6 million compared to last year's third quarter of $77.9 million. The components of the increase were as follows

[Operator:]

[Operator Instructions] And our first question is from the lines of James Fronda with Sidoti & Company.

[James Fronda:]

Is there any way to, I guess, offset the rising food costs other than to raise prices right now?

[K. Scott Gray:]

Well, I think that our posture is that we want to remain competitive in the marketplace and to be of value to our customers to keep the frequency. So right now, it's about introducing items that we mentioned in our manager's specials that have some favorable food cost where we're introducing a new item at a good price, that it's not just moving the mix from one of our existing products over to the other but providing an everyday value. And we have taken some selected price increases, but we feel confident that, as you can see, sequentially, that as the price differential year-over-year on spending has gone down, traffic has gone up.

[James Fronda:]

Okay. And the 12 remodels you're expecting for the rest of the year at Luby's, is that on top of the 11 that you've done already? Or is that going to be total?

[K. Scott Gray:]

Well, total.

[James Fronda:]

Okay. And I guess even with the remodels, I mean, traffic does seem to still to be an issue. I guess is there anything specific other than the remodels that you think you can do to help improve that going forward?

[K. Scott Gray:]

We think that our strategy is sound. We do have -- again, we've got our -- had some favorable results this year with doing more exterior remodels. We think that's important to continue. From a trend standpoint, I can report on a month -- kind of a calendar monthly basis that at Luby's, in the month of May, we turned to an entrée count positive 1%. That was from being down 2.5% in the month of April. So -- and that -- I think that's similarly seen in the marketplace from just a macro level on spending. So we're starting to see a little bit of improvement there. But we still need to go through our existing stores and protect those cash flows with making relevant changes to the units. It's kind of a restart for the units. When you go in and invest, the whole team gets behind it. We do grand reopenings on the stores where we invest, and it really sets the store up for some improved performance. And we continue to see that even stores that are trending down negatively have improved their performance on both sales and cash flow.

[James Fronda:]

Okay. And lastly, I guess, how quickly do you think your -- you'll be able hope to see some growth at Cheeseburger in Paradise?

[Christopher J. Pappas:]

I think that one is -- we need some more time with that one. We're just implementing our programs on that. We're getting -- we're on the other side of winter, and so we get a little chance to get in there a little more frequently, probably, and easier to get in there. And so, it's a small piece of our business. At the end of the day, I think it's kind of like Culinary Contract Service business. It's a small part of our business now, but it does give us a foothold into the casual dining segment, which we didn't have before. And so -- but we want to get in there and learn about it. And -- but it's not going to be the driver for us.

[Operator:]

Our next question comes from the line of Jeff Gramm with Bandera.

[Jefferson Philip Gramm:]

I'm curious. I know that the concepts are very different. But have you considered a co-branding at Cheeseburger with Fuddruckers?

[Christopher J. Pappas:]

That's probably one that hadn't been on our radar. But everything is conceivable. But those are so close together that from the standpoint of the product that both of them are selling. And the Cheeseburger -- Cheeseburger in Paradise concept, the hamburger obviously is a big part of their business. And so I think those would be too similar, I think, to put together. But the Fuddruckers -- but the Cheeseburger could go with the Luby's. Okay? So there could be some connection there because, again, Luby's doesn't sell hamburgers.

[Jefferson Philip Gramm:]

Yes. But -- And I just thought that there's -- when you think about the Fuddruckers brand, even though it's family oriented and that stuff, like you still -- the first thing that you think of is a good and big, juicy burger. And I wonder if you had a Fuddruckers-Cheeseburger in Paradise, if that would help to -- the consumers understand that they have a really good burger at those restaurants.

[Christopher J. Pappas:]

If they were -- again, are you hypothesizing both of them be next door to each other? Like we did in the [indiscernible] next door?

[Jefferson Philip Gramm:]

No, no. I kind of just mean putting the brand of Fuddruckers on Cheeseburger signs and having it be known that it's a Fuddruckers burger. So like -- so just incorporating the Fuddruckers brand and the kind of -- that knowledge that it's a good burger because it's a Fuddruckers burger into the Cheeseburger restaurants. Because I do feel like a problem with that restaurant was ultimately, the food was not that great, even if -- even at the good ones.

[Christopher J. Pappas:]

Yes, we have done that quietly behind the scenes. The -- but we're not doing any marketing to that direction. I think we have brought the quality of the Fuddrucker burger into the brand now. So we -- they are actually cooking the bun at the location, at the 23 Cheeseburger in Paradises. So at the -- the waiters and waitresses and the guests are getting that quality of protein and bun in the store currently. So we -- and that is a big portion of the guests that are eating in the Cheeseburger concept. So we've done it through the quality of the product, but we're not advertising it. And at this point, we have not set the direction to advertise that it's of the same quality, exact same quality and processes that the Fuddrucker hamburger is produced under. So, interesting comment about it. We will put that in our archive of ideas.

[Jefferson Philip Gramm:]

Great. I mean, and you guys are the experts. I -- it could be interesting just to try with, well, 1 of the 23. Just toss it on the sign, like you don't have to advertise it and just...

[Christopher J. Pappas:]

Got you, got you. Thank you.

[Operator:]

[Operator Instructions] And we do -- so we have a follow-up from Jeff Gramm with Bandera.

[Jefferson Philip Gramm:]

I mean, I'd have called you up offline like with these, like they're minor questions. But I figured I will just do it now. I know that you changed the bun when you took over Fuddruckers. And I'm curious, have you gotten any customers feedback? And have any of the customers complained that it's a little bit of a heavier bun?

[Peter Tropoli:]

The -- Jeff, it's Peter Tripoli. The bun was slightly updated about a year after -- about 9 months after we bought it. We added egg to it, to the mix, basically, was -- and the reason we did that was so that the burger wouldn't break down by the end of the burger eating experience. And it achieved our goals. And when it's properly toasted, it doesn't break down as often as it was. That's really -- we have not received a lot of complaints about that, and it's been generally well received. Fuddruckers does have a poofy bun because it's baked in-house, but it compresses as you eat it. So it really has not -- we have not received a lot of complaints about that. We have a customer -- Chris referenced our QR Code-based customer comment system, and the bun is not the source of the comments we get. More is generally how long it took to get the custom-grilled burger.

[Operator:]

Thank you. And we have no further questions at this time. I'll turn it over back to management for any closing remarks.

[Christopher J. Pappas:]

So thank you for joining us on the call today. Please remember our fourth quarter is a 16-week quarter, so our next call will be in November. And we look forward to speaking with you then. Thank you.

[Operator:]

Ladies and gentlemen, this concludes Luby's Third Quarter Earnings Conference Call. If you'd like to listen to a replay of today's conference, please dial [phone] with the access code of 4611123. ACT would like to thank you for your participation. You may now disconnect.