Luby's, Inc.
Q4 2014 Earnings Call Transcript

Published: 10 Nov 2014

[Operator:]

Please standby. Good morning, ladies and gentlemen. Thank you for standing by. And welcome to Luby's Fourth Quarter Fiscal 2014 Conference Call. Today presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, November 10, 2014. I would now like to turn the conference over to Steve Goodweather, VP of Financial Planning Analysis and Investor Relations. Please go ahead, sir.

[Steve Goodweather:]

Thank you. And welcome everyone to Luby's 2014 Fiscal Fourth Earnings -- 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 10, 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, included -- 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.

[Chris Pappas:]

Thanks, Steve. Good morning, everyone. And thank you for joining us on our fourth quarter earnings conference call for fiscal 2014. 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 financial performance in fiscal 2014, followed by an update on new restaurant development during the year. I will then review each of our businesses by brand before turning the call over to our CFO, Scott Gray, to review the financial results in more detail, and finally, I will discuss our outlook for the business heading into fiscal 2015 before opening the call up to questions. Our total sales in fiscal 2014 increased by approximately $10.2 million or 2.7%, compared to 2013. This increase was primarily driven by the $8.3 million increase in restaurant sales of which $5.3 million was from combo locations and $4 million was from Luby’s Cafeteria. At Cheeseburger in Paradise sales grew by $1.9 million, reflecting a greater number of operating weeks. At Fuddruckers sales decreased $1.4 million at stand-alone Fuddruckers restaurants. While in our Koo Koo Roo brand sales decreased $1.6 million, decrease as we cease operation at these two locations by the end of fiscal year. The other contributor to our year-over-year total revenue growth came from $1.9 million increase in culinary contract service sales. From a profitability standpoint Cheeseburger in Paradise masked the sustained good performance at our core Luby’s Cafeteria brand, where store level profit margin grew by 30 basis points. Cheeseburger in Paradise financial performance reduced total company profitability by $2.3 million on an after-tax benefit basis. In other words, without this drag on profitability, we would have reported positive income from continuing operations. We took aggressive actions during the year to revise our strategy for maximizing the value from the 23 Cheeseburger in Paradise leasehold locations that we purchased on December 6, 2012. We now believe we are on a path to profitability for this brand. From a development standpoint, fiscal 2014 was a significant year for our company having opened more new units than any fiscal year since the 1990s. We exceeded our new restaurant development goals in fiscal 2014 by opening a total of 15 restaurants, 12 our new restaurant locations, and 3 more locations we converted from Cheeseburger in Paradise restaurants into Fuddruckers restaurants. As we discussed in the past, we believe the strong growth engine for the company and our brands will come through these new combo units. These locations consist of 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 guests. We have received very positive 'yes' feedback from Fuddruckers customers that are now discovering the excellent offerings of our Luby’s brand and vice versa. We began the year with one combo unit in operations and then opened additional four combination units during fiscal 2014. We now operate five of these combination units representing 10 restaurants, 5 Luby’s Cafeterias and 5 Fuddruckers. These locations in the aggregate are meeting our sales expectations, but they require additional labor and other costs in initial weeks of operation. These additional costs are investments to ensure a high level of customer service and to ensure the overall guest experience exceeds expectations. First Impressions with our guests at these new locations are very important. Our sixth combination unit is under construction in Jackson, Mississippi and will be our first combo location outside of Texas. As these locations progress beyond their opening periods, we believe they serve to grow our core brands and overall companywide operation whose operating result will be offering as a good investment return. In addition to the record number of new combo units opened this year, we also opened one new Luby's Cafeteria and six new Fuddruckers. The six new Fuddruckers included three that were new to our portfolio and three that we converted from Cheeseburger in Paradise to Fuddruckers. The three new locations included one new location, construction stand-alone Fuddruckers on property we already owned near a Luby's Cafeteria in Houston, the second was converted retail space in Austin, Texas and third location, which is south of Houston was acquired from a franchisee. The three locations we converted from Cheeseburger in Paradise to Fuddruckers are located in Illinois, New York and Virginia. Location in Virginia was reopened as a full-service restaurant as an extension to the Fuddruckers brand. The experience at the new start Fuddruckers is different from our standard Fuddruckers restaurant. As is typical in full-service, the guest is [radiantly interested by our hostess seeing it] (ph), offered a menu and serve by general wait staff. While the focal point of the menu is the Fuddruckers world's greatest hamburgers on fresh baked buns and a variety of created topping combinations, many other options are presented to the guests. These included full selection of appetizers, soups, salad and handheld entrées, lighter side choices and desserts. This is all supplemented with an extensive drink menu book at the bar. From a franchises standpoint, we also opened three new franchised Fuddruckers locations in the U.S. and three internationally. Lastly, with our Luby's Cafeteria brand we relocated one existing restaurant from its location in the shopping mall to new building that we constructed in our pad site in front of the mall. This location in South Texas mirrored the success in terms of sales growth and profitability that we had realized at a similar rebuilt location in Houston during the prior fiscal year. Luby's Cafeterias same-store sales grew by 1.4% due to guest traffic increases. I would like to now review our business by discussing each of our brands, Luby's Cafeteria and Fuddruckers remain our core brands offerings comprising the largest number of restaurants and contributing the majority of revenues. These brands have strong customer recognition in the markets and they have long and established reputations for quality and service. Their core menus remain constant, although we continually introduce and rotate new menu offerings throughout the year to remain relevant to both our existing customer base and to attract new guests. We offer a range of price points, which include premium items featured on weekend as well as more price sensitive manager special throughout the week. We increased our marketing efforts during fiscal 2014 with several forms. We continue to see results from our e-mail and Facebook offerings to our e-club database. These are our loyal customers and we’re able to reward them with offers. At our company Fuddruckers units, we are experimenting with intraday promotions being specially delivered to specific each club members for specialty priced offers at selected off-day -- off-time day parts. We also increased direct mail offers to our guest homes as well, an avenue that has generated a solid response from our guests. In addition, we added radio advertising on Spanish-speaking stations to ensure we were reaching and resonating with this important segment of our guest population. Finally, we also increased our air time with cable TV advertising. Next, at our Fuddruckers brand, our efforts center around the following

[Scott Gray:]

Thank you, Chris. Good morning. I’ll elaborate on the financial performance for the quarter and the fiscal year. Before I get started, please note that we have posted investor presentation on our website, as we typically do under @lubysinc.com, under the investor relations’ tab and events section. The presentation contains an information we think is useful in evaluating the company. I’ll begin with the total company results and then cover results by business segments, followed by few balance sheet highlights, including an update on our credit facility. Adjusted EBITDA for total company, which we defined as total company EBITDA excluding Cheeseburger and new restaurant opening costs, for the fourth quarter was $5 million or 4.4% of total revenue excluding CIP sales, compared to $7.8 million or 7.2% in the prior year. Adjusted EBITDA for the full fiscal year 2014 on that basis was $22.3 million or 6.2% of total revenue excluding CIP, compared to $26 million or 7.3% in the prior year fiscal 2013. For both the fourth quarter and the fiscal year, the decline in adjusted EBITDA was driven in large part due to profit after food cost from higher sales being absorbed by higher labor and operating expenses and higher G&A, primarily from higher professional of services expenses in the year. For the fourth quarter, the total company realized the loss from continuing operations of $1.1 million or $0.04 per share. Excluding special items, our loss from continuing operations was $1.4 million or $0.05 per share. For the fiscal year 2014, we are reporting a loss from continuing operations of $1.6 million or $0.06 per share, compared to income from continuing operations of $4.5 million, or $0.16 per share in the prior year. In the fourth quarter fiscal 2014, total restaurant sales decreased $0.4 million relatively flat. Stores that we had open since were opened prior to fiscal 2012, where repurchase legacy stores contributed $5.6 million to the year-over-year sales increase. Now, this increase was offset by the absence of $5.0 million in stores that have closed, so new stores are outpacing closures now at this point. Also offsetting the increase in sales at new stores is a $1 million decline in stores at legacy, stores which we consider which are restaurants and were in operation prior to 2012. Note that the sales from the new stores represent 8.9% of our total sales in the fourth quarter this year, compared to only 3.6% last year. For more information on our brand sales volumes, please see page 30 and 31 in the investor pack. Store level profit margin for the restaurant segment decreased from 11.9% in the fourth quarter last year to 11% in the fourth quarter this year. This decrease was primarily due to higher payroll related cost and food cost. Food costs were negatively impacted by significant rise in beef costs, which impacted our Fuddruckers brand to the greatest extent. Much of the higher payroll related cost reflected elevated levels of staffing at new restaurant openings. Total restaurant sales for the full year increased $8.3 million, which breaks down into $15.8 million increase from new stores and a $0.3 million increased in legacy stores, offset by a $7.8 million decrease in sales from stores that have closed and no longer contribute to our total restaurant sales. Fiscal ‘14 was a very active year for our team, with a total of 15 openings and 21 closings. Note that the 21 closings include 15 Cheeseburger in Paradise restaurants, three of which are now operating as Fuddruckers brand and six more are closed for future reopening as Fuddruckers with six closed for disposal. The remaining closes reflect two Koo Koo Roo restaurants where the lease cost has been justified as continuing operations, as well as three Luby's Cafeterias and one Fuddruckers where the lease expired, or where we were able to sell the locations to generate cash for future reinvestments in new units. Store level profit margins for the fiscal year decreased to 100 basis points to 12.1%, compared to 13.1% in the prior year. We are not satisfied with the store level profit and are focused on improving store level profitability in 2015. During the year, higher food and labor cost accounted for about half of the decline in store level profit margin. The other half resulted from a number of factors, including utilities expense and marketing and advertising expense. Now, despite the cost pressures for the year, I’d like to highlight the performance at our core Luby's Cafeteria brand. At our cafeteria brand, restaurant sales increased $4 million, driven in large part from a 1.4% increase in cafeteria same-store sales and from a newly opened Luby's Cafeteria in Eagle Pass, Texas. Store level profit for the cafeteria brand expanded 30 basis points higher to 16.3 in fiscal 2014. Moving on to the other business segment, Culinary Contract Services continues to grow both, in the number of location service as well as profit margin. Two years ago, we had targeted margin ranges of 7% to 9% for the business for the segment. We are pleased to report our fiscal 2014 margin was 12.8% on topline culinary revenue of 18.6%. Segment profit for Culinary Contract Service segment grew to almost 2.4%. Our Fuddruckers franchise business segment also grew franchise revenue slightly at $0.1 million. The franchise revenue increase reflects fees earned when franchise owners opened stores under their development agreements. Now, moving on to the balance sheet, we ended fiscal 2014 with $42 million and our debt outstanding compared to $19.2 million at the end of last fiscal year. The increase in our debt balance reflects utilization of our credit facility along with cash flow from operations and sale of assets to make investments in new unit development. We recently amended our credit facility with our lenders on November 7 to provide for our capital needs going forward in light of our current trailing cash flows. The amended adjust our key financial covenants to provide reasonable availability under our credit facility for our plans in fiscal 2015 forward. As stated in our earnings released in June, we plan to reduce our capital expenditures as we work on increasing cash flow from operations to fund capital investments. Our amended agreement has an annual capital expenditure limit of $25 million, which is in line with the company’s plans next year in 2015. Our total capital expenditures for fiscal 2015 will range from $20 million to $25 million. This is significantly reduced from the 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 from operations. To conclude, our long-term investment strategy 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 Culinary Contract Services and Fuddruckers franchisees that business segment. We seek to reinvest in our existing restaurants as well as they generate much of the cash flow that supports a development of new restaurants, which offer an opportunity for higher investment returns. All of our investments are carefully considered to maintain an appropriate level of financial leverage on the company. And with that, I'd like to turn the call back over to Chris.

[Chris Pappas:]

Thanks, Scott. As I mentioned earlier in the call, we exceeded our new restaurant development expectations in 2014, much of which occurred in the later part of the year. Our newly opened restaurants were generating solid customer traffic and revenue during their honeymoon phase. While pleased we met our restaurant development goals we did not meet our overall financial goals in fiscal 2014. Our focus now is working beyond the opening periods and improving store level profit at these new restaurants. As we do each year, we will make the necessary investments to ensure our restaurants are inviting to our guests with refresh looks and remodels where necessarily. Our goals in fiscal 2015 are to maintain same-store sales trends at Luby’s Cafeteria and to achieve positive same-store sales at Fuddruckers compared to fiscal 2014. In addition, we’ll continue to move forward with new developed plans both through building program and franchise network programs. But our new development plans will be at a reduce rate in fiscal 2015 compared to our record same pace in '14. We currently plan to open three new restaurants in 2015, consisting of one Fuddruckers in a newly developed shopping center and one combo location reflecting two restaurants. For our franchise pipeline, we expect at least seven new location openings in fiscal year 2015, some of those domestically and some in international markets. We anticipate certain expense headwinds such as food, commodity costs, but we also are encouraged by certain economic factors that benefit our guests, including lower gas prices and generally improving consumer confidence. Regardless of economic environment, our goal is to grow sustainable cash flow in the year 2015 and beyond. Before turning the call over to the operator for questions, I would like to take the opportunities to thank the dedicated work our Luby’s team continues to deliver throughout organization in serving our guests and improving our brands. With that, Operator, I would like to open up the call to questions.

[Operator:]

Thank you, sir. (Operator Instructions) Our first question will come from James Fronda with Sidoti & Company. Please go ahead.

[James Fronda:]

Hi, guys. How are you?

[Chris Pappas:]

Good, James. How are you?

[James Fronda:]

Good. Thanks. Just on the rising same-store sales for the start of fiscal ’15 for Fuddruckers, what do you think is driving that specifically?

[Peter Tropoli:]

James, this is Peter Tropoli. We’ve been focusing on a number of sales development efforts…

[James Fronda:]

Okay.

[Peter Tropoli:]

… to kind of energize our customers about some of the products we offer. I think that contributed to it. We also -- as we spoke in the call, we reoriented our compass to make sure that we’re focusing on the customer and both at the time that they order…

[James Fronda:]

Okay.

[Peter Tropoli:]

… as well as we’re working on our ticket times. We leveraged our new kitchen display investment that we made last year to be able to monitor our ticket times and we’ve reduce those. Customers want to get their food in less than 10 minute. And then we also invested a little bit in labor and have a greater force in the dining rooms, checking in with our customers and making sure that everything met their expectations.

[James Fronda:]

Okay.

[Peter Tropoli:]

So, we also, go ahead.

[James Fronda:]

And yeah, now, that make sense, go on.

[Peter Tropoli:]

And then we also introduced our menu last year that we have tested that focused on burgers, chicken and salad, and it's been popular as well.

[James Fronda:]

Okay. And are there any other, I guess, opportunities in terms of vitalizing both the Fuddruckers’ Magic brands? I mean, the strategy going forward would be combo store in Fuddruckers, right?

[Peter Tropoli:]

The growth strategy going forward is combo stores, would also [super staining] (ph) Luby’s where appropriate. We have both of those prototypes and then our third prototype we opened up a new Fuddruckers in Houston in a medical center that was ground-up construction and then we’re opening one in Maryland in the next few weeks here. And then we also continue to sell franchise -- sell franchises, although, there has been more -- little bit more demand internationally than domestically.

[James Fronda:]

Okay.

[Peter Tropoli:]

And we continue to fight for institutional accounts as well.

[James Fronda:]

Okay. That makes sense. All right. Thanks guys.

[Peter Tropoli:]

Thank you.

[Chris Pappas:]

Thank you.

[Peter Tropoli:]

Thanks, James.

[Operator:]

(Operator Instructions) Thank you. That will conclude today’s question-and-answer session. I would like to turn the conference back over to Mr. Chris Pappas for any additional or closing remarks.

[Chris Pappas:]

Thank you, Operator, and thank you all for joining us today. We continue to appreciate your interest in Luby’s and hope you all have the opportunity to dial with us if you’re in the market. We look forward to speaking with you again when we announce our first quarter results in December.

[Operator:]

Ladies and gentlemen, this concludes today’s Luby’s conference call. If you’d like to listen to our replay of today’s conference, please dial [phone] or [phone] and reference confirmation number 9035685. The conference and I would like to thank you for your participation. You may now disconnect.