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Luby's (NYSE:LUB)

Q1 2014 Earnings Call

December 20, 2013 11:00 am ET

Executives

Steve Goodweather

Christopher J. Pappas - Chief Executive Officer, President, Executive Director and Member of Executive Committee

K. Scott Gray - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

James Fronda - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Luby's First Quarter 2014 Conference Call. [Operator Instructions] This conference is being recorded today, December 20, 2013. I would now like to turn the conference over to Mr. Steve Goodweather, VP of Financial Planning. Please go ahead, sir.

Steve Goodweather

Thank you, and welcome, everyone, to Luby's 2014 Fiscal First 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, December 20, 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.

Please also note that we have posted a quarter 1 2014 investor relations supplementary document on our website at lubysinc.com under the Investor Relations and News section. Select pages from this document will be referenced during today's conference call.

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 first quarter earnings conference call for fiscal 2014. With me today are Scott Gray, our Chief Financial Officer; and Peter Tropoli, our Chief Operating Officer.

We continued a steady momentum for fiscal 2013 into our first quarter of fiscal 2014. Our Luby's Cafeteria team generated solid 2.4% same-store sales growth compared to the same quarter last year, excluding the Thanksgiving calendar shift. Our total same-store sales, including our Luby's Cafeteria and Fuddruckers brands together was a positive 1.1% on the same calendar-shifted basis. Our first quarter fiscal 2014 ended on November 20, 2013 due to a year-over-year calendar shift.

The 2014 fiscal first quarter did not include the Thanksgiving holiday, whereas at fiscal 2013, the quarter ended on the day before Thanksgiving, when many of our guests picked up their holiday meal packages. We were pleased with the operating performance we achieved at our core concept restaurants of Luby's Cafeteria and Fuddruckers. Both maintained or improved their profit margins, driven primarily from better year-over-year labor deployment.

Turning now to new restaurant development, we continue to gain traction, both through new restaurant openings and by strengthening our development pipeline. During the quarter, we opened one new Luby's Cafeteria in Eagle Pass, Texas, a town in South Texas near the border with Mexico; and 2 new Fuddrucker franchise locations, one in North Dakota and one in California. We also had a few closures including one of the 2 remaining Koo Koo Roo locations in California and one Fuddruckers franchise location in West Texas.

After the first quarter ended, we also ceased operations at 2 unprofitable Cheeseburger in Paradise restaurants. In addition, last week, we announced the new reopening of a 6,600 square foot Fuddruckers fast casual restaurant, from a conversion of one of our Cheeseburger in Paradise locations in Algonquin, Illinois, a northwest suburb of Chicago. Algonquin is an important market for us and we are committed to being a part of that community. In fact, our involvement there since purchasing Cheeseburger in Paradise led us to realize that the dynamics of this location were better suited to Fuddruckers.

At Fuddruckers, we are progressing on our strategy of repositioning the brand as a leader in the fast casual burger segment, with an emphasis towards a slightly smaller footprint and premium, offering us exciting menu items. Over the last 3 years, we have updated the menu while keeping the hamburger central to the offering. We placed emphasis on specialty burgers, but also complemented the offering with new chicken sandwiches, upgraded onion rings and our Coke Freestyle dispensers, offering our guests over 100 different beverages. The updates to the menu coincide with our remodeling efforts to present a refreshed decor.

On our development side, we've opened restaurants in a number of configurations by converting and acquiring pre-existing restaurant spaces. These include a converted operation called Cheesy Jane's Burger, an Arby's restaurant and a former Chili's location and a couple of former Fuddruckers sites that we reopened.

These conversion sites gave our team the opportunity to develop the interior and exterior designs, equipment packages, et cetera, and provided our franchisees with a variety of conversions scenarios for their brand. The next phase of our development is beginning with the first new Fuddruckers constructed from the ground up, followed on by opening a leased location in a newly developed retail center. These locations will all be additional proof points for our Fuddruckers strategy and for our franchise network.

At our Cheeseburger in Paradise brand, we continue to introduce best-in-class restaurant processes and systems to the operations. Our customers, commitment to provide a guest a better burger, a better bun and a better overall dining experience is gaining traction. Our Cheeseburger in Paradise management team and restaurant employees are working diligently every day to enhance the customer experience and improve the financial results at these locations. I'd like to thank all of the members of the Cheeseburger in Paradise team for their flexibility and perseverance at these restaurant locations.

Turning now to one of the most exciting aspects of our new restaurant development strategy, our new combo units, which are comprised of Luby's Cafeteria and of Fuddruckers that sit side-by-side at one of our locations. We continue to be pleased with the results of the first location we opened near Houston over a year ago, and we've discussed before the side-by-side Luby's Cafeteria and Fuddruckers as a key component of our near-term growth strategy. All in all, new restaurants are meeting or exceeding our internal targets, which gives us confidence for our future development plans.

Now I'd like to take you through these development plans. We are currently on pace to open 6 stores in our fiscal quarter -- second quarter that ends February 12, 2014, pending any unforeseen delays that would push openings back to the beginning of our fiscal third quarter. At our new Cinco Ranch location, we will open a new combo unit of Luby's Cafeteria and Fuddruckers in the Houston suburb of Katy, which will include 2 new restaurants at 1 location. Katy, Texas, an established and still growing residential market with a large number of neighborhoods and businesses in the marketplace.

Next, in Austin, Texas, we will also open a new combo unit of Luby's Cafeteria and Fuddruckers at a location called Slaughter Lane. Also, in the Austin area, we will be opening another Fuddruckers at a BK location -- BK road location. These 2 near simultaneous Fuddruckers openings in the Austin area provide an opportunity to leverage marketing for the 2 restaurants.

In Houston, in the Medical Center, our McGregor location, Luby's will introduce a new Fuddruckers restaurant built next to an existing Luby location. The building has already been constructed and should be equipped, staffed and ready for opening within the first couple of weeks of January. We're very proud of our development and operations team for reaching a milestone for the company to be to open 6 restaurants in 1 month. We hope to spread them out just a little bit so they don't all open in the same day. This is a great accomplishment and consistent with our strategic commitment to grow our company through opening new restaurants.

Other planned openings that will be coming soon include a new Fuddruckers in Brandywine, Maryland at a new shopping center development. This location is slated for a late September -- I'm sorry, a late spring 2014 opening. A new combo unit, Luby's and Fuddruckers, will be in Rockwall, Texas, just outside of the Dallas, Texas area. This opening will represent an additional 2 new restaurants. This location is slated for a summer 2014 opening and will be our third combo unit in fiscal 2014 and the fourth overall combo unit that we've built.

Another new combo unit is also being developed in Webster, Texas, just south of Houston, to open in the later -- in calendar 2014, again, representing 2 new restaurants. At our core brands of Luby's and Fuddruckers, we will continue our remodeling program and have identified 10 to 15 locations that we plan to remodel in 2014. We anticipate investing approximately $35 million to $40 million in capital expenditures in fiscal 2014, including $14 million for restaurant openings and beginning construction in fiscal 2014 for openings in 2015, up to $6 million in restaurant remodels and up to $10 million to purchase parcels of the land for new restaurant development.

Finally, as we shared with you during our November conference call for the fourth quarter of fiscal 2013, our Culinary Contract Services business continues to perform well, and we've improved the mix and the margin of this business line. Earlier in the first quarter of fiscal 2014, we signed an agreement with a system of 3 hospitals in our home base of Houston. This agreement includes food service for over 750 beds, as well as a large retail food component. These operations are expected to start around March of 2014. We're excited to be chosen again as a trusted partner to provide our well-recognized menu offerings in a hospital setting.

Now, I'd like to turn the call over to Scott Gray, who will elaborate on our financial results in the first quarter fiscal 2014, and then I'll comment on our 2014 outlook before opening the call up to your questions. Go ahead, Scott.

K. Scott Gray

Okay. Thank you, Chris, and good morning, everyone. Today, I'll go through our fiscal Q1 2014 results this morning. Please note that if you visit our website at lubysinc.com, you'll find under our Investor Relations tab, under the News selection, a investor pack. I'll refer to a few pages as I go through my comments.

As Chris stated, excluding the negative impact of the Thanksgiving holiday sales shift this year, our total company same-store sales for the quarter were up 1.1%. The entirety of this holiday shift affected only our Luby's Cafeteria brand. This net 1.1% rise in same-store sales included a 2.4% increase in same-store sales of Luby's Cafeterias, partially offset by a 2.3% decline in Fuddruckers.

Excluding the shift was the result of guest traffic up 1.6% as well as customers spend up 0.7% at Luby's Cafeteria units. The Luby's same-store sales performance includes one relocated unit, which was in a leased operation that operated for 21 years and then relocated very close to its original space on a new owned restaurant pad site, where we built from the ground up.

This far Texas unit contributed $0.4 million in sales or 1/3 of the total Luby's Cafeteria same store sales increase of $1.2 million. The 2.3% same-store decline at Fudds compared to positive comps in the prior year of 0.9% last year, 4.5% in 2012 and up 3.2% in 2011. Fuddruckers' traffic declined in the quarter, 4.8% compared to last year. The decline in traffic was due to changes in our discounts and special offers and modest price increases. Year-over-year, customer spend was up 2.7%. Speaking on a year-to-date basis, as of our period 4, which ended December 18, 2013, our total company same-store sales are up 0.8%, which is consistent with our annual guidance.

Let's move on to our company-operated restaurant segment store level expenses, starting with cost of food. As a percentage of restaurant sales, food cost rose 50 basis points to 28.7% versus 28.2% in the prior fiscal year's first quarter. Excluding cheeseburger for comparability to the prior year, food cost as a percentage of restaurant sales declined 10 basis points to 28.1%. The decline, excluding CiP, was the result of the absence of high food -- food cost holiday meals where we run a higher percentage food cost due to the Thanksgiving calendar shift and modest price increases, which were partially offset food commodity price increases of 2% at Luby's and 6% at Fuddruckers.

Moving on to payroll and related expense cost. Total payroll and related cost as a percent of restaurant sales were 35.4%, an increase of 30 basis points from last year's first quarter. Excluding cheeseburger, payroll and related expenses were 34.2%, a decrease of 80 basis points compared to last year. The Cafeteria brand realized a 60 basis points decline to 34.9%, and Fuddruckers brand realized a 90 basis point improvement to 32.3%, both on lower restaurant sales year-over-year in the quarter.

Moving on to operating expenses, which excludes occupancy costs, reported separately. Operating expenses were up 100 basis points to 19.1% in the first quarter fiscal of 2014. Excluding Cheeseburger, operating expenses rose to 18.2%, a slight uptick from 18.1% last year. Operating expenses were down 10 basis points to 18.1% at Cafeterias and up 50 basis points to 18.9% at Fuddruckers compared to last year. Our occupancy cost rose 60 basis points to 6.1% versus 5.5% in the prior year's first quarter given the greater portion of our locations that are leased with Cheeseburger units this year versus last.

Now for our store-level profit margin. I'd like you to also refer to Page 12 and 13 of the investor pack for a year-over-year store-level profit dollar bridge. Year-over-year store-level profit margin declined to 10.7% in the first fiscal quarter 2014, including Cheeseburger in Paradise units. Without Cheeseburger, year-over-year store-level profit margin rose 70 basis points to 13.9% from 13.2% last year. This result in our core brands compares to -- of 13.9% compares to prior year of 13.2%, 13.7% in 2012 and 8.8% in 2011.

Now I'd like to provide you with a few store-level margin stats from our new locations compared to our legacy unit averages. Luby's -- starting with Luby's Cafeterias. 4 new open Cafeteria store-level profits averaged 20% in the quarter compared to 16% at the legacy units. Included in that is our first prototype combo unit, which produced 18.3% store-level profit in the quarter. And this compares to last fiscal year for this unit on an annual basis where it produced 20% store level profit on over $5 million in sales in year one of operation, where its sales exceeded our expectations of approximately $4.5 million.

The sales breakdown between the brands at the combo unit are 75% of the sales were at Cafeteria side and 25% on the Fuddruckers unit. We expect sales in year 2 to level off below the $5 million and closer to the range of our expectations of $4.5 million with the absence of the honeymoon period.

Now with regards to our second and third combo units, which have been built. We will open those in our fiscal second quarter, absent any unexpected delays. Regarding Fuddruckers, over half of the converted units that Chris spoke of are performing on par with the legacy unit average store-level profit in the quarter of 11.6%. We are looking forward to seeing how our new retail developments that Chris spoke about in our pipeline performed.

Culinary Contract Services sales were up $0.4 million or 11.2% year-over-year and Culinary store-level profit was up -- was $0.6 million, up from $0.4 million in the prior year's quarter. Franchise revenue was essentially flat year-over-year in the quarter at $1.5 million.

Total company revenue, excluding Cheeseburger, for the quarter decreased 1.1% with EBITDA, excluding CiP, increasing to $4.7 million or 5.9% of total revenue from $4.3 million or 5.4% of total revenues in the same quarter last year.

Regarding EBITDA, please refer to Page 5 in the investor pack. Our trailing 13-period EBITDA was $22.8 million as of the end of this quarter compared to $25.2 million in the -- at the same time in the prior year. This decline is primarily due to sales and higher cost at Cheeseburger during the brand rebuild phase. Excluding Cheeseburger, trailing 13-period EBITDA as of Q1 2014 was $25.9 million, which is up compared to a trailing EBITDA last year at quarter 1 of $25.2 million.

Now onto our balance sheet. We ended the first quarter with $1.8 million in cash, $24.3 million in debt and up to $41 million available under our recently expanded revolving credit facility of $70 million. Our available credit is based on our trailing EBITDAR results, applying our total leverage bank covenant.

Moving on to cash flow statement. Cash flow from operations was $3.9 million in the first fiscal quarter this year compared to $6.6 million in the prior year, primarily due to Cheeseburger. Regarding capital expenditures, refer to Pages 6, 7 and 8 in the investor pack. I'll report that during the first quarter, we invested $9.2 million in property and equipment compared to $4.9 million in the prior fiscal year 2013. This increase is primarily related to the new construction that Chris mentioned that's in progress for restaurant openings coming online in the coming months.

And with that, I'd like to turn the call back over to Chris.

Christopher J. Pappas

Thanks, Scott. In summary, our core brands are performing better year-over-year, and we're working hard to control costs while making prudent investments in marketing our brands to maintain and drive increased guest traffic. Cheeseburger, obviously, is taking a larger transition than we originally anticipated, but I feel confident that we have identified the issues that have developed and have developed action plans to apply changes to the concept, including some restaurant conversions and remodels as we have done at the Algonquin location in Illinois.

We're dedicated to enhancing the customer experience while still maintaining our focus on managing our expenses throughout our brands. And as we stated in our press release, we expect same-store sales to grow up to 1% during the year and our restaurant sales to range between $375 million to $385 million, with $8 million to $10 million coming from new store openings. We're proud of the work our team continues to achieve in satisfying our guests and improving our brands.

With that, operator, I'd like to open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of James Fronda with Sidoti & Company.

James Fronda - Sidoti & Company, LLC

Could you just talk a little more about the Cheeseburger outlook? Do intend to refurbish any of the restaurants? Do they need to be refurbished? And do you forecast any store closures going forward?

Christopher J. Pappas

Probably all of the above, okay, just as -- it's a good general statement. Well, we've converted that first one. And when we were looking at acquiring the brand, we had this in -- within mind as one of the options to do to the underperforming stores is to convert some of them. And so we're looking at that right now as far as conversions to the Fuddrucker brand for some of the locations. And as far as refurbishing existing stores, they -- we had -- I think we had talked about it possibly on another conference call that we might do some carpet in some of the stores. There might be some minor tweaks too, maybe some of the better operating stores that are out there.

K. Scott Gray

We just -- well, maybe opening up the kitchens potentially and some of the best performing ones. And then in terms of closing any units, we'll -- we closed 2. We don't have any on the periphery, but that -- there could be maybe one, a very small 1 or 2 left over. Potentially, we just have to see.

James Fronda - Sidoti & Company, LLC

Okay. And what about for Koo Koo Roo, is there a possibly of closing the remaining 2 stores?

K. Scott Gray

Okay. So Koo Koo Roo, we have one store remaining, and we're looking to convert it to a Fuddruckers. We're working with the local authorities to make that change.

James Fronda - Sidoti & Company, LLC

Okay. And can you, I guess, disclose what the same-store sales are for that location in Houston that's the combo?

K. Scott Gray

Well, the combo...

James Fronda - Sidoti & Company, LLC

Of the Luby's and Fuddruckers?

K. Scott Gray

Yes. It's off of its honeymoon, so it did over $5 million in year one, so it's down. And we think that for the year, it's going to be probably, like I said, be more in line with the original expectations of about $4.5 million.

James Fronda - Sidoti & Company, LLC

All right. And I guess, other than the restaurant openings, I guess, can you give us a sense of what you think it could take to get stronger same store sales for you guys? I know the consumer situation is rough, but anything specific?

Christopher J. Pappas

I think continuing on with our value proposition and continuing to educate our customers, listen to our customers, make them feel welcome when they're in the restaurants and operating well.

K. Scott Gray

The Luby's number has been pretty good, the more updating that we do should be able to keep it competitive. The Fuddruckers number has been a little bit soft, and we're looking at the appropriate value proposition for Fuddruckers that could -- that would balance a traffic-building initiative and a frequency initiative with not discounting too much. So we're -- we've got some options to balance that and in addition, some better remodels going forward.

Operator

And I'm showing no further questions at this time. I would now like to turn the call back over to Chris Pappas for closing remarks.

Christopher J. Pappas

Well, thank you for joining us today on our conference call and we look forward to updating you in March for our next quarter conference call, and have a happy new year. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect.

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