Ken Dennard – DRG&E
Christopher Pappas – President and CEO
Scott Gray – SVP and CFO
Brad Deason – SMH Capital
Luby’s, Inc. (LUB) F4Q09 Earnings Call October 15, 2009 5:00 PM ET
Welcome to the Luby’s Incorporated fourth quarter earnings conference call. (Operator instructions) I would now like to turn the conference over to Ken Dennard, of DRG&E. Please go ahead, Sir.
Thank you operator and welcome everyone to Luby's fourth quarter fiscal year 2009 conference call. This call is also being webcast and you can access the audio replay on our website at Lubys.com.
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 operational 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 included 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 ability of credit, as well as other risks and uncertainties disclosed in the company's periodic reports on Form 10-K and Form 10-Q.
I would now like to turn the call over to Luby's President and CEO, Christopher Pappas. Chris?
Thank you and welcome everyone to our fourth quarter conference call. In the fourth quarter we continued to feel the impact of an extremely challenging macroeconomic environment that has affected both the frequency and amounts our customers are spending with us. With a high level of unemployment, consumers are spending their hard earned dollars judiciously. Grocery stores are picking up market share as families are choosing to eat in more often. These factors as well as increased foreclosure rates and low consumer confidence have resulted in industry-wide soft sales.
Over the spring and summer in response to this phenomenon we saw our competitors reducing prices and aggressively discounting to improve traffic. Like our competitors we did not stand still. We worked diligently to address our decline in customer traffic. Our first step over the summer was to launch a number of value initiatives to build goodwill with our customers and to be more competitive in this new market place. I will describe these initiatives later on in the call.
We also took this challenging time to conduct a thorough review of our operations and to make a few tough decisions; decisions ultimately we felt were in the best interest of our shareholders and for the company. As explained in our press release today, after thoroughly evaluating each of our stores’ near and long-term potential, we are closing 25 stores. This strategic initiative is designed to stabilize and strengthen our core operations and thereby improve our cash flow from operations.
By focusing on our core store base we believe that over time we will be better positioned when appropriate for future growth. The review examined each of our stores and determined if it was best for the long-term value of our company and our shareholders to continue operating each of them or whether the capital we had invested in them should be reallocated. As a result of this analysis we made the decision to close 25 stores. Two of these stores are leased and 23 are owned stores which we will be actively marketing for sale.
Since the beginning of our new fiscal year we have already closed six locations and the remaining 19 will be closing over the next few weeks. We are waiting to release the names of the remaining closing units until we have a chance to speak with our employees. I would like to express my sincere appreciation to the employees at each of these stores for their dedicated service. As you might imagine, this has been a very difficult decision for us but one we concluded we had to make.
As we mentioned in our press release in conjunction with the closing of these stores we took a $19 million asset impairment charge in the fourth quarter. $13.8 million was related to the store closure plan and $5.3 million associated with continuing operations. In the first quarter fiscal 2010 the company will discontinue operations at these locations and will dispose of them through property sales, property leases or lease settlements with landlords. Our preliminary estimate of future cash expenditures related to these store closings is approximately $4-4.6 million for employee severance, payment of remaining accounts payable and other liabilities as well as other costs.
We believe that removing these restaurants from our portfolio puts us in a better position to increase EBITDA given that these locations either had low or negative cash flow as of the most recent fiscal year. Collectively we hope to realize approximately $25-30 million from the sale of the 22 currently owned locations now closing over the next 36 months. Our intention in the long-term is to reinvest the proceeds from the sale of the closed properties such as expanding our Culinary Contract Service businesses, upgrading our existing retail units and/or building new retail units. In the near-term we may have to use some of the proceeds to fund our operations. Once we close these 25 units we will have a stronger core of 95 retail locations as well as 15 Culinary Contract Service locations and 27 properties held for sale.
As we move through the next year we will be closely monitoring an additional 5-10 locations which may close depending on future cash flow performance. These additional closures would take place over the next 24 months. With these efforts we hope to become even stronger operationally in terms of our capital structure. In most of the markets with a closed unit there is another open Luby’s unit within the same trade area. Therefore, we are putting ourselves into a position to be able to capture some of the sales that might be lost.
We will still have a strong presence throughout Texas especially in our core markets of Houston, Dallas, San Antonio, Austin and the Rio Grande Valley. We will continue to keep you up to date on our progress over the implementation of the plan. At this point I would like to turn the call over to Scott Gray. He will be reporting on our financial results for the quarter and year and walking you through some of the charges associated with the implementation of the plan to date.
After Scott’s remarks I will review the marketing and promotional initiatives that we have underway and discuss future plans aimed at increasing cash flow from operations. Scott?
Thank you Chris. Good afternoon everyone. I will now take you through our financial results for the fourth quarter which was a 16-week period that ended August 26, 2009. I will also touch on our results for the fiscal year as well as some more details on our business plan which Chris discussed.
Starting with the income statement, we reported a loss from continuing operations in the fourth quarter of $23.3 million or $0.83 per share compared to a loss from continuing operations of $3.7 million or $0.13 per share in the same quarter last year. Basically we had two charges in the quarter. One Chris mentioned related to asset impairments which was a pre-tax asset impairment charge of approximately $19 million or $0.45 per share after tax associated with asset impairments. Two, a deferred tax asset valuation allowance recorded at $5.1 million or $0.18 per share after tax.
In the fiscal year our loss from continuing operations was 26.2 or $0.93 per share. Excluding the impact of the impairment charge and the valuation allowance, the loss from continuing operations for the fiscal year was $0.30 per share.
Total sales decreased 13.2% in our fourth quarter fiscal 2009 to $84.2 million compared to $97.1 million in the same quarter last year. Culinary contract service sales were $4 million in the fourth quarter compared to $3 million in the same quarter last year. Restaurant sales in the fourth quarter were $80.2 million compared to $94.1 million in the same quarter last year. The $13.8 million decline in restaurant sales included a $1.5 million net decline in sales related to closed stores not fully offset by new restaurant sales.
Same store sales which consisted of 117 restaurants decreased approximately 13.6% due primarily to declines in guest traffic. Same store sales were also impacted by a 1.2% decline in the per person average spend during this year’s fourth quarter compared to the same quarter last year as a result of Luby’s lowering prices and value priced offerings.
The company calculates the per person average as restaurant sales net of discounts or net sales divided by the number of entrée’s sold. Culinary Contract Services revenue increased 33% to $4 million in the fourth quarter compared to $3 million in the same quarter last year. The increase was due to Culinary Contract Services operating 15 facilities as of August 26, 2009 compared to 10 facilities as of August 27, 2008. Culinary Contract Services continues to be profitable after direct G&A costs. We continue to be pleased with the expansion of our brand through this component of our business strategy.
In fiscal 2009 our total sales declined 7.8% compared to the prior year. Restaurant sales were down 9.6% and same store sales were down 8.6%. Culinary Contract Services sales increased 51.1%.
Moving onto food costs, food costs decreased approximately $3.7 million in the fourth quarter of fiscal 2009 compared to the same quarter last year due to lower sales volume. However, as a percentage of restaurant sales food costs increased to 28.8 in the fourth quarter of fiscal 2009 from 28.5 in the fourth quarter last year primarily due to the impact of lower promotional menu prices associated with our value initiatives. For the fiscal year food cost as a percentage of sales were flat at 28% this year compared to 27.9% last year.
Payroll and related costs decreased $2.6 million in the fourth quarter of fiscal 2009 compared to the same quarter last year. We have made great strides in decreasing our hourly employee overtime as evidenced by an approximate $1 million decline in overtime wages this quarter versus the comparable quarter of last year. On the whole the decrease in payroll dollars was due to lower sales and the positive impact of a reduction in hourly overtime dollars which is slightly offset by an increase in regular wages due in part to higher average wage rates. Payroll related costs as a percentage of restaurant sales increased to 2009 from 36.3 in the same quarter last year primarily due to lower restaurant sales.
Our new labor scheduler and improved labor deployment by our managers was key to reducing our overtime costs and managing our labor in this tough, declining sales environment. For the fiscal year payroll related costs as a percentage of restaurant sales increased to 37.2 from 35% last year.
Moving on to other operating expenses which primarily include restaurant related expenses for utilities, repairs and maintenance, advertising, insurance, supplies, services and occupancy costs decreased by approximately $3 million compared to the same quarter last year due primarily to lower utilities and repairs and maintenance costs.
As a percentage of restaurant sales other operating expenses increased to 27% compared to 26.2% in the same quarter last year as Luby’s continued to invest a greater percentage in advertising and marketing to drive customer traffic and to enhance brand awareness. We believe these dollars are a key ingredient to maintaining our market share and informing our customers of our value initiatives.
For the fiscal year other operating expenses as a percentage of restaurant sales increased 50 basis points to 24.1 this year compared to 23.6 last year while other operating expense dollars decreased $5.7 million this year compared to last year. Store level profit which we define as restaurant sales minus costs of food, payroll and related costs and other operating expenses totaled $4 million or 5% of restaurant sales compared to $8.6 million or 9.1% of restaurant sales last year. For the fiscal year store level profit as a percentage of restaurant sales was 10.7 or 11.2 excluding $1.3 million in Hurricane Ike related direct expenses which compared to 13.5% last year.
Clearly our store level profit margin was impacted by our declining sales. However, our cost containment initiatives have enabled us to limit the store level profit decline as a percentage of restaurant sales.
Depreciation and amortization expense increased to approximately $200,000 in the fourth quarter compared to the same quarter last year due to a higher depreciable asset base. For the fiscal year depreciation expense increased by $1.2 million similarly due to a higher depreciable asset base.
General and administrative expenses include corporate and restaurant area leader salaries and benefit related costs including share based compensation, professional fees, travel, recruiting expenses and other office expenses. G&A expenses decreased by approximately $545,000 in the fourth quarter compared to the same quarter last year. The decrease was due to cost cutting initiatives we have rolled out including a reduction in corporate staffing.
As a percentage of total sales, G&A expense increased to 8.3% in the fourth quarter compared to 7.8% in the same quarter last year. For the fiscal year as a percentage of total sales G&A expenses increased to 8.4% this year compared to 8.2% last year.
Moving on to the balance sheet, at August 26, 2009 we had $882,000 in cash and cash equivalents and nothing drawn on our revolving credit facility. As of today, October 15th, our average weekly loans outstanding are running approximately $1.7 million under our credit facility. As of the end of the 2009 fiscal year our book value per share was $5.83 which included the impact of the asset impairment charge and the deferred tax asset valuation allowance.
As of August 26 we had four owned properties and four brown leases reported at $3.9 million as property held for sale on the balance sheet which are valued at the lower of net depreciable value or net realizable value. This figure does not include the properties that we will be selling in association with the closure of the 25 underperforming units. During the quarter we sold one property for $730,000 which was in excess of its net book value.
The stores that will close in the first quarter of fiscal 2010 will be reclassified to property held for sale and reflected as such in the Q1 2010 balance sheet. Under this first quarter plan 25 locations will close of which 22 are owned properties and three are under brown leases. We estimate approximately $25-30 million in net proceeds from the sale of the stores closed in the first fiscal quarter 2010. The proceeds from these stores as well as the proceeds from our property held for sale at the end of the fourth quarter will be redirected to Culinary Contract Services, selected existing unit upgrades and general corporate purposes.
Long-term assets included $6.9 million in auction rate municipal bonds reported at fair value which were impaired in the fourth quarter as well, slightly, due to their illiquidity. These bonds had a par value of $8.7 million as of August 26, 2009.
Cash flow from operations was $6.2 million this year compared to $17.6 million last year primarily due to a $29.6 million decline in restaurant sales year-over-year. Capital expenditures were $2 million in the quarter compared to $14.9 million in the same quarter last year and $12.3 million for the fiscal year compared to $40.3 million last fiscal year.
We have been working with our banking partners to restructure our credit agreement in light of our recent decline in cash flow from operations in order to maintain our compliance record going forward. Our banks have already provided an improved term sheet to the company and management is working on some modest changes to the terms that are more favorable. The credit facility will be a fully secured $20 million facility and will provide for financial near-term covenant relief and required levels of EBITDA.
Although there is no absolute assurance of an agreement until it is executed by both parties, we do expect to complete and execute a second amendment to our credit facility within the near-term.
As we move through 2010 the elements of our business plan include the following; One, the closure and sale of the company’s underperforming assets. A focus on sales development and labor productivity as well as food and operating costs of management at the remaining core locations. Three, increased emphasis on the expansion of Luby’s Culinary Contract Services. We feel these elements are key to the viability and profitability of the company.
Given today’s volatile economic environment any outlook provided is subject to risks and uncertainties. Therefore the guidance we will be providing is limited since we are assuming that the existing market conditions will continue to negatively impact our guest frequency and restaurant sales and anticipate that new promotions may reduce our profit margin. As we move through the fiscal year we plan to give you, our shareholders, more clarity as hopefully the economy continues to stabilize.
During 2010 we will continue to spend our capital prudently. We currently expect continuing capital expenditures for fiscal 2010 to range from $4-4.5 million and Culinary Contract Service capital expenditures could vary significantly depending on the requirements of new location agreements. We plan to fund capital expenditures primarily through proceeds from the sale of assets and our credit facility to the extent unfunded by cash flow from operations.
We expect, as many other restaurants are anticipating, same store sales to continue to trend negatively through 2010. On a bright note, we currently anticipate Culinary Contract Services to continue to grow through the addition of more healthcare, university and corporate dining facility locations and add them to our list of managed locations. Although we will not be giving line by line expense guidance as in the past, please know that our team will continue to be focused on building sales and cutting costs where possible.
Now I would like turn the call back over to Chris.
Thank you Scott. Before I review fourth quarter restaurant operations I am pleased to report that our Culinary Contract Service business continues to grow. We now operate 15 client locations. Accordingly our Culinary Contract Service revenue increased nearly 58% to $13 million for 2009 fiscal year compared to $8.2 million in the prior fiscal year. Our reputation and brand equity continue to strengthen in this arena. We view this business as an additional vehicle to expand our brand; a brand that stands for fresh, made from scratch dining. Others are noticing it too.
We recently made the list of Food Service Management’s top 50 institutional food service providers. The ability to open our brand up to these healthcare and institutional facilities is a good way to continue our growth even in the midst of tough economic times. Luby’s brand proposition is competitive in this institutional environment and it nicely complements our retail street concept. While the sales cycle for these types of contracts can be difficult to forecast and it often takes some time to bring these projects to fruition, we expect to continue expanding our brand and growing revenues in this division as our talented and motivated sales team is actively promoting our offerings.
I would now like to discuss some of our current operational initiatives. We are competing hard to gain share in our markets. In April 2009 we began offering the Lu Ann for $5.99 Monday through Friday both at lunch and at dinner. Since our conference call in June we have tested, implemented and tracked the results of several additional promotional value offers. Many of our competitors have taken a similar approach and introduced a number of new items to their menus at a distinctively lower price point and we believe our strategy to do the same is appropriate at the current time. We are focused on ensuring the perception of value that our customers expect and require in today’s marketplace for the level of high quality items we serve.
In mid July Luby’s announced it was rewinding 100 prices and introduced a promotion that allows guests to buy one combo and get one half off after 4 p.m. seven nights per week. Additionally we offered the $5.99 power lunch with a different menu item each day, bringing a substantial value and variety at that attractive price point. To advertise these value offerings we launched an 86 billboard messaging campaign across our markets. Big, bright, compelling signs. Luby’s also rolled out a radio campaign in Houston, Dallas, Austin and San Antonio.
Additionally, we supported this message with in-store extensive point of purchase materials. We believe each of these offerings successfully improved traffic to our stores that we would not have captured otherwise. We believe our current guest was able to dine with us more frequently due to the new value offers and new guests were enticed by our billboards and word of mouth to try at the great low price of $5.99. With regard to our prototype units that were built in the last two years, like almost all our peers we scaled back our pace of new unit development in order to focus on improving cash flow from existing operations. Our new stores continue to outperform our existing stores. However, they too have been affected by a softening sales environment.
As we move into our new fiscal year we continue to launch new value offerings for our customers including offering a dual tiered power lunch, one daily selection priced at $5.99 and another at $6.99. By finding innovative ways to increase our customer frequency our brand should grow and we will continue to build goodwill with our customers.
During 2010 we will continue to roll out our build your own salad offering, an initiative that has tested well in numerous stores. Our customers have told us they like being able to pick and choose what goes into their salad. Along with the build your own salad initiative we will be focusing on ways to add incremental purchases to our customer’s kitchens such as combo add ons of hot vegetables, soup and salad for only $0.99 each which is nearly half off the ala cart price as well as introducing smaller deserts like our Signature cupcakes and cookies.
We will also be introducing new display pans that will keep our food hot and attractive at the same time. The pans are of heavy metal which we hope will reinforce our customer’s perception and desire that the food came right out of the oven yet they are modern in design. We invite you to come to one of our locations and see the difference once they are out.
As we start a new fiscal year I would like to lay out our goals for fiscal 2010. However, let me first say that we expect that restaurant sales in general will lag the broader economic recovery that is expected to take place in 2010. For us to see any material improvement in our same store sales revenue at our retail units it will take a change in consumer confidence about their own near-term and longer-term outlook of their personal finances in our areas of operation. We don’t believe we will see any substantial improvement in that trend for the 2010 fiscal year.
We will continue to offer our customers competitive price points to promote customer frequency. However, we do not anticipate that profit improvements are probable in our fiscal 2010 at most units, thus a net loss from continuing operations is expected in 2010. Our over-arching goal for 2010 is to be cash flow positive and then return to profitability as soon as possible. To do this we must stem sales declines by increasing customer frequency and spending through new promotions and product offerings.
We are committed to improving existing store level execution, increasing customer frequency and ultimately improving operating margins. We will continue to manage our food, labor and other store costs and G&A without compromising our operations. Our secondary goal is to strengthen our balance sheet through the sale of these closed stores. We believe these goals will put us in a position to continue to maintain the strength of our balance sheet and our core operations during this challenging time.
Longer-term we seek to continue to expand our brand by growing Culinary Contract Service business, investing in new units and opening new restaurants once the economy and our cash flows improve. We believe that the focused execution of our near-term and long-term plans will enhance shareholder value.
With that, I would now like to open the call to questions. Operator?
(Operator Instructions) The first question comes from the line of Brad Deason – SMH Capital.
Brad Deason – SMH Capital
You all had made the comment that with the stores you are closing there were other stores close by or relatively close. Is there any way you can kind of define generally speaking how far away the other stores might be and kind of how much of the traffic from your old stores you are closing you might think you could recapture?
I will take the tail end of that question first and I guess that is related to the sales transfer. Typically our has been depending on the location it is a modest amount. We are not really even in our own projections we are not really counting on that. Sometimes you do have some transfer. Typically it has been relatively minor, 5-8% transfer, but that is by no means representation of what it would do for the whole company.
Then I guess with regards to the location a lot of the locations we are closing we do have stores like we said nearby and I will let Chris speak to how our locales look there.
In a couple of major markets there some are as close as three miles and some are as far as five to six miles. In regard to sales transfer it will generally impact one unit generally is what we will see. One or two units. It is not something that is measurable across the board but it will be measurable a lot of times at a single store that is in that 3-5 mile range of the store.
At this time I am showing no further questions in the queue. I would like to turn the call back over to Mr. Pappas for closing remarks.
Thank you. We appreciate all your attendance today and continuing interest in Luby’s. We look forward to visiting with you on our next quarter conference call.
Ladies and gentlemen that does conclude our conference for today. If you would like to listen to a replay of today’s conference please dial 303-590-3030 with the access code of 4166310#. We thank you for your participation. At this time you may now disconnect.
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