Luby’s, Inc. F1Q09 (Qtr End 11/19/08) Earnings Call Transcript

| About: Luby's, Inc. (LUB)

Luby’s, Inc. (NYSE:LUB)

Q1 2009 Earnings Call

December 17, 2008 5:00 pm ET


Rick Black – Director IR

Christopher Pappas – President & CEO

Scott Gray - CFO


Will Hamilton – SMH Capital

[John Koehler] – Oppenheimer


Good afternoon. At this time I would like to welcome everyone to the Luby's first quarter fiscal year 2009 conference call. (Operator Instructions) I would now like to turn the call over Mr. Rick Black, Director of Investor Relations; please go ahead sir.

Rick Black

Welcome everyone to Luby's first quarter fiscal 2009 conference call. This call is being webcast and you can access the audio replay via our website at www.luby'

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; plans for expansion of the company's business including the expected financial performance of the company's prototype restaurant and future openings of new or replacement restaurants, are forward-looking statements and involve risks and uncertainties including but not limited to, general business conditions; the impact of competition; the success of operating initiatives; changes in the cost and supply of food and labor; the seasonality of the company's business; taxes; inflation; governmental regulations and the availability of credit, as well as other risks and uncertainties discussed in the company's periodic reports on Form 10-K and Form 10-Q.

Now I would like to turn the call over to Luby's President and CEO, Christopher Pappas.

Christopher Pappas

Thank you and welcome to our first quarter conference call. During my opening remarks, I will comment on the current restaurant operating environment before I turn the call over to Scott Gray, our CFO to review our financial results in more detail.

Later on in today’s call I will discuss initiatives taking place at Luby’s to manage our business during this economic slowdown.

Let me begin by stating that our team remains focused on improving profitability, generating cash flow from operations, and maintaining financial flexibility with a healthy balance sheet.

In the first quarter which began in September, we experienced a worsening economy with sharp declines in the stock market, the collapse of the national credit markets, and increased mortgage foreclosures all of which negatively impacted consumer confidence and retail sales.

In addition Hurricane Ike impacted our restaurant sales at over 40 restaurants and we incurred increased expenses related to damages and costs associated with reopening our restaurants as quickly as possible.

While there are still many economic challenges we have confidence that we can weather this market downturn as we have in the past by making sound business decisions. As shareholders we remain committed to Luby’s and its long-term prospects.

Harris and I recently extended our employment agreements through late 2010 and have committed to managing Luby’s through this difficult period to serve our customers, improve our business, and enhance shareholder value for all Luby’s investors.

I would now like to turn the call over our CFO, Scott Gray, to review our financial results.

Scott Gray

Thank you Christopher and good afternoon everyone. I would now like to take you through our financial results for the first quarter and discuss our current outlook for the remainder of fiscal 2009.

Starting with the income statement, we reported a loss from continuing operations in the first quarter of $2.1 million or $0.08 per diluted share compared to $4.8 million or $0.17 per diluted share in the same quarter last year, primarily due to a $5.7 million decline in restaurant sales along with higher costs and expenses.

Contributing to the loss in this 12-week quarter were approximately $900,000 in Hurricane Ike related expenses, which are included in our other operating expense line in our income statement.

Total sales decreased 6% in the first quarter to $68.9 million compared to $73.4 million last year. Culinary contract service sales were $3 million in the first quarter compared to $1.7 million last year.

Restaurant sales in the first quarter were $65.9 million compared to $71.6 million last year, a decline of 7.9% or $5.7 million.

The amount of $1.2 million of the restaurant sales decline was related to closed stores partially offset by new restaurant sales. On a same store sales basis which consists of 117 restaurant, sales decreased approximately $4.5 million or 6.7% due primarily to declines in guest traffic partially offset by higher menu prices.

The negative impact of Hurricane Ike and the unfavorable calendar shift on a same store sales basis were approximately 2.9%. In other words our same store sales were down approximately 3.8.

Food costs decreased approximately $1.4 million in the first quarter compared to last year due to lower sales volume. Food costs as a percentage of restaurant sales increased 30 basis points to 27.7% in the first quarter compared to last year primarily due to the increased commodity costs for oils, shortening, beef, and seafood, partially offset by higher menu prices.

Payroll and related costs increased $200,000 in the first quarter compared to last year due to higher wage rates. Payroll related costs as a percentage of restaurant sales increased 3.3 percentage points to 37.4% in the first quarter compared to last year primarily due to the deleveraging of the cost of labor with lower sales volume and higher wage rates.

Last year’s payroll related costs for the first quarter as a percentage of restaurant sales benefited 1.2 percentage points due to a reduction in Workers’ Comp expense. Excluding this benefit in the prior year, payroll related costs for the quarter would have been up 2.1 percentage points.

Other operating expenses increased by approximately $800,000 compared to the same quarter last year primarily due to Hurricane Ike related expenses. As a percentage of restaurant sales, other operating expenses increased 3.1%.

I will note that no insurance proceeds were recognized in the quarter related to Hurricane Ike.

Store level profit which we define as restaurant sales minus cost of food, payroll and related cost, and other operating expenses, were $6.5 million or 9.8% as a percentage of restaurant sales compared to $11.8 million or 16.5% last year.

This decline is primarily due to the decline in restaurant sales as well as $900,000 in hurricane related expenses. Store level profit as a percentage of sales excluding the hurricane expenses was 11.2%.

Depreciation expense increased approximately $400,000 in the first quarter compared to last year due to higher depreciable asset base generated by increased capital expenditures in fiscal 2008.

General and administrative expenses increased by approximately $100,000 in the first quarter compared to last year. As a percentage of total sales, general and administrative expenses increased to 8.9% in the first quarter compared to 8.1% in the same quarter last year.

The increase was primarily due to a $400,000 increase in corporate salaries expense related to staffing cost including severances partially offset by lower professional fees.

Excluding approximately $160,000 in severance cost in the quarter, G&A expenses were flat compared to last year.

Moving now to the balance sheet, at November 19, 2008 we had $2.3 million in cash and cash equivalents and zero debt outstanding. However we did utilize our revolving credit line during the quarter.

In property held for sale as of November 19, 2008 we had six owned properties and four ground leases recorded at $6.3 million which are valued at the lower of net depreciable value or net realizable value.

During the first quarter we sold one property. Also in the first quarter we closed one owned property and one leased property and reclassified both as property held for sale.

Long-term assets include $8 million in auction rate municipal bond securities which were impaired last quarter due to their illiquidity. These bonds have a par value of $8.85 million. We intend to hold these securities until their liquidity returns.

With regards to cash flow, cash flow from operations was $1.7 million this year in the quarter compared to $6.8 million last year, a $5.1 million decline primarily due to lower restaurant sales and higher costs.

Capital expenditures were $5.5 million this year compared to $7.9 million last year due to a reduction in discretionary capital project expenditures during the quarter.

Our outlook for fiscal 2009 assumes that the existing market conditions will continue to negatively impact our guest frequency and current sales and expense trends are likely to continue through fiscal 2009.

Based on our outlook and recent decline in cash flows from operations we continue to expect capital expenditures for fiscal 2009 to be in the range of $12 million to $17 million.

With regards to sales we currently expect same store sales to continue to trend down over fiscal 2009 due to the anticipated traffic and frequency declines in the current operating environment. In fiscal 2009 we anticipate a reduction in restaurant sales of $5 million per store closures due to lease expirations, and/or underperformance, offset by $2 million from partial year new restaurant sales from units that will open in fiscal 2009.

While modeling our culinary contract services sales is difficult, we anticipate culinary contract service sales to be 20% to 30% higher compared to fiscal 2008.

Food costs, we continue to expect food costs as a percentage of restaurant sales to be between 27% to 28% in fiscal 2009. Labor costs, we continue to expect payroll related costs as a percentage of restaurant sales to be between 35.5% and 37% in fiscal 2009.

In the fourth quarter fiscal 2009 we expect a significant rise in labor costs as the third step in the minimum wage increase takes effect impacting a greater portion of our employees.

We expect other operating expenses excluding opening costs to be in the range of $72 million to $74 million. With regards to G&A, we continue to expect general and administrative expenses to be in the range of $25 million to $26.5 million for fiscal 2009.

After that update as Christopher mentioned, the current economic conditions are challenging. This type of operational environment will continue to challenge us to better manage our operating margins. And with that I will now turn the call back over to Christopher.

Christopher Pappas

Thanks Scott. The financial results for quarter were disappointing however in light of the current economy and significant pressure on the retail and restaurant sectors, we were able to generate cash flow from operations and maintain a healthy balance sheet.

Despite real challenges in our industry and the macro economy we are pleased how our team is working hard to improve our store level execution. Harris and I believe we are operating better at the store level then we were last year.

Our team here at Luby’s has proven the ability to manage the company through difficult times and we are confident we will be able to do it again. In the near-term we are committed to improving existing store level execution and operating margins.

Long-term our plan is to continue to expand our brand by opening new restaurants and growing our culinary contract services business. As almost all restaurant companies have done, we have scaled back our pace of new unit development as we focus on improving cash flow from existing operations and net income per share.

We continue to believe that during current economic difficult times conditions it is important to build out of cash flow from operations and not leverage the balance sheet. As we told you on our last call, we still plan to build one to two new units in 2009 and we’ll monitor costs and returns on capital closely as we work to improve our new unit economics.

From an operations perspective we are committed to improving our customers’ dining experience at Luby’s which will in turn improve our financial performance. Our employees are the core ingredient to achieving this success.

The training and development programs that are in place at Luby’s today are a critical component in achieving enhanced store level performance and profitability. We believe our operational execution has improved over this past year in part through our focus on higher standards.

In the first quarter we introduced a new tiered marketing menu selection and pricing strategy aimed at providing selected menu items and prices to best accommodate the specific markets based on store volume and geography.

Our menu lineup of over ten combination items which are called our Luby Classic Combos, will remain constant company-wide. However this new system will allow for flexibility to showcase daily specials and additional specific food offerings at special price points.

Management will continue to monitor, evaluate, and revise these efforts to best serve our various markets. Last month we launched a fresh new branding and marketing campaign at the end of the first quarter which is designed to capture the spirit of the Luby’s dining experience and communicate our strengths and unique qualities.

Our new motto, “Here, You Rule” campaign distinguishes our brand by highlighting that we bring meals to life by allowing our guests to have the freedom to control their entire experience at Luby’s.

At this time the new campaign is primarily composed of radio commercials, external billboards, and in-store marketing. We believe the campaign is a fresh and compelling and witty endorsement of our brand that will help drive traffic while reinforcing Luby’s strengths.

In light of volatility in the current cost environment cost management remains an important area of our focus. We continue to focus on effective labor deployment through advancements in technology, restaurant managers can monitor and control costs better without compromising customer service.

Beyond what we can control there are also cost advantages opportunities that could benefit Luby’s in the future. We hope to benefit from the recent declines in gasoline prices in our markets and we will attempt to capture the best pricing available in commodity markets.

Turning now to our culinary contract services business where we provide food service primarily in health care facilities, this business continues to grow and we are now operating at 11 client locations. Our reputation and brand equity are growing in this area and we continue to view this area of business as an additional vehicle to expand our brand.

As we progress through our [physical] year we will continue to navigate what we expect to be a difficult macroeconomic condition as we strive to improve sales, manage costs, and grow store level margins and fund new growth primarily through cash flow from operations.

With that I would now like to turn the call over for your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Will Hamilton – SMH Capital

Will Hamilton – SMH Capital

I was wondering if you could comment a little bit more on the culinary service business, that did quite well this quarter up about 74% year-over-year and that’s obviously ahead of what you’re sort of suggesting for the full year, was there anything one-time or are you being maybe conservative on the full year guidance.

Scott Gray

Yes, I think that’s really it because again, these are, we’re in talks all the time with potential clients and we don’t have enough experience yet to base how these are going to come in online and so that’s why the guidance is the 20% to 30% for the year.

Will Hamilton – SMH Capital

Okay so was it in this particular quarter new contracts that drove it or was it maybe the [Bailor] Hospital seeing more traffic then usual or something.

Scott Gray

Well we had one additional contract that was added in as well as increases at some of the existing ones. That’s exactly right.

Will Hamilton – SMH Capital

Is that, when you include the G&A expenses to that, or associated with that business is that now break-even?

Scott Gray

We’re still not where we want to be on it, we’re still working to improve the net on that. So again we’re still committed. We think this is a good business line to leverage our brand. But its positive but again we haven’t reached our goal percentage yet but again this business from a capital standpoint, capital expenditures investment is much lower, and has a lot more upside on returns on an ROI basis so but we have the team in place and now is the time to just add the new clients to leverage the existing infrastructure we built.

Will Hamilton – SMH Capital

On the cost side for the restaurant business obviously difficult environment but overall the margin for the restaurant business was a little bit better and saw some sequential improvement versus Q4, I was wondering if during the quarter or if more recently you’ve seen any marginal improvement with some of your food, utility, fuel surcharge costs, any color on that would be helpful.

Scott Gray

After finishing just the first quarter we really, we don’t really see us changing our outlook for the full year.

Will Hamilton – SMH Capital

But with I’d say natural gas now at $560, oil lower as well, and some of the grains lower, have you seen any improvement from that, or is that still possibly to come or you just—

Scott Gray

Again we feel that we’ve been able to position ourselves more favorable in the later half of the year with respect to utilities. As that price continues to dip we’ll obviously have a little bit more upside for the units that are floating, that are regulated markets which is approximately 30 locations and the others that we do not already have a lock on the natural gas price which we use to determine our price at the electricity on the deregulated market units, so we think that later on in the year we might see that but at this time we feel like that our guidance range is where we should be in terms of communicating externally where we think we’ll end up for the year.

Will Hamilton – SMH Capital

And then I was wondering with G&A expenses what you’re doing to try to get that in line with what you’re seeing at the top line, are you cutting back on any areas particularly since unit growth is now one to two versus more accelerated growth before?

Scott Gray

We did have some attrition in the first quarter but the number of the personnel was very small and really eliminated some redundancies. As we mentioned in our remarks without severance costs our G&A is flat with last year. With regards to our construction department, the department is quite lean and again last year we were in the process of building that. We don’t feel that we’re overstaffed there.

They’re working on planning projects even though we have cut back, they’re also involved with the existing unit projects.

Will Hamilton – SMH Capital

I was wondering, you mentioned for same store sales the impact from both Hurricane Ike and also the Thanksgiving shift to be 2.9%, how much was the Thanksgiving shift so that we can adjust that for the impact in the second quarter?

Scott Gray

The majority, it was kind of a balance, but the majority of it was probably the Thanksgiving shift of that.

Will Hamilton – SMH Capital

The majority of the 2.9% you’re saying.

Scott Gray

Yes, probably about half of it was Thanksgiving.


Your next question comes from the line of [John Koehler] – Oppenheimer

[John Koehler] – Oppenheimer

I missed something earlier, culinary contract services were expected to be up 20% to 30% higher then the year ago, I’m guessing.

Scott Gray

That’s correct.

[John Koehler] – Oppenheimer

Okay because they were flat on a sequential basis so it looks like that business there, I don’t know if there’s any seasonality to that or if it really is flat on a sequential basis.

Scott Gray

Basically it changes as we add new contracts and so what we’re trying to model for the full year is that as we sign new contracts up through the year we think they will wind up at, if you look at the annual number in 2008 that the 2009 number compared to that will be a 20%, 30% higher.

[John Koehler] – Oppenheimer

So that’s on an annual basis. And then it looks like there was some change in the real estate held for sale. It looks like there was a gain on the income statement of about $200,000--

Scott Gray

That’s correct.

[John Koehler] – Oppenheimer

And then there was a, the cash flow was $1.1 million was the benefit on the cash flow statement, right.

Scott Gray

Correct, proceeds from the sale of the asset.

[John Koehler] – Oppenheimer

Ballpark is it safe to assume then that that’s representative of the—

Scott Gray

No, each one will be different, each site is different, each deal, there’s really not a way to use that as a proxy for the other locations that are included in the 6.3 on the balance sheet.

[John Koehler] – Oppenheimer

Are they roughly similar size?

Scott Gray

No, not necessarily. We have some, again there is included in that is the six owned properties and there’s four ground leases.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Christopher Pappas

Thank you and we look forward to visiting with you again on our next quarter conference call and we want to wish everyone a safe holiday and I look forward to visiting with all of you again on the next quarter conference call. Thank you.

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