Luby's Fuddrucker's Acquisition: Pure Genius

Jun.20.10 | About: Luby's, Inc. (LUB)
To say that Luby's (NYSE:LUB) stunning announcement that it was the successful bidder in the bankruptcy auction for Fuddruckers was a surprise is an understatement. A better description would be a total shocker! Who would expect a chain that doesn’t even have its own house in order, would go out on a limb and buy someone else’s problem? Obviously the purchase is looking like "pure genius," if you gauge it by Wall Street’s reaction, as the Street quickly marked up the cafeteria chain’s share price up a whopping 12% in a matter of minutes.
A deeper look: LUB stands to acquire a total of 201 locations, effectively tripling its store count from 96 to 297 in one fell swoop. Although 138 units are franchise-owned, those franchise fees alone could amount to $15 million a year in LUB’s coffers. At a purchase price of $60 million, they could recoup their entire investment in four years, just from these fees alone.
Obviously LUB could do any number of things once the deal is consummated, from refranchising existing corporate stores, closing down stores, selling off assets or monetizing real estate assets (assuming there are any). They may even try and just flip the entire chain to another buyer at a hefty profit, if the opportunity so arises. The point is, they are buying a chain for pennies on the dollar and should be able to reap the benefits of doing so whether they sell it in its entirety, sell it off in pieces or fix it!
Latest earnings report shows progress: The company just reported a solid third quarter, earning 3 cents on sales of $57.2 million. Although sales dropped 5.4%, there are glimmers of hope developing, as the company’s culinary services division realized a 9.9% rise in sales (they now operate 17 locations versus 13) and total sales actually increased on a sequential basis. Helping earnings were cuts in just about all cost categories including payroll, falling 50 basis points to 35.1%, SG&A, down 30 basis points to 9.5% and “other expenses," plummeting from 22% to 19.4%. Store level profit was up 9.5% from $8.9 million to $9.7 million. The only problem child, “cost of food,” alarmingly went the wrong way, spiking from 26.9% to 27.4%. LUB also ended the quarter with zero debt and $15 million of cash on its books.
Analyst coverage initiated: LUB finally received some notice when Capstone Investment’s restaurant analyst Stas Kiselev initated research coverage last month with a buy rating (his firm is the only one covering LUB); Kiselev gave the stock a $5 price target, which he thinks is conservative.
Bottom line: The acquisition of Fuddruckers could be construed as a “game changer,” but until more details of the acquisition are made public, it’s hard to say how far these shares could sail. In the meantime, a quick trip to the $5 level seems more than in order.

Disclosure: Long LUB