Luby's (LUB) recently reported fourth quarter earnings of 5 cents (excluding 5 cents of onetime gains), proving 2.5 times higher than consensus estimates of 2 cents, while sales of $114 million came in $10 million more than expected. At first reaction, you would think the report was solid, but apparently it was not good enough to garner Wall Street’s praise. In fact, by the way the stock price acted, the “street” was clearly disappointed that same store figures actually dropped .6% (a 1.7% increase in average guest check was not enough to offset a decline in traffic). In addition, tepid fiscal 2012 guidance offered in the range of 9 to 12 cents (assuming same store sales growth of .25% to 1.0%) didn’t exactly help matters either.
The meat and potatoes of its fourth quarter: The Texas based eatery was successful in controlling its payroll and general/administrative cost centers when it recorded 50 and 470 basis point respective reductions, to 34.8% and 8.4% of sales. On the other hand, its “cost of food” category rose from 28.2% to 28.4%, while its “other operating expense” category experienced a 40 basis point increase to 23.5% of sales.
On the sales front, cafeteria operations (94 stores) were essentially flat at $73.1 million, culinary contract sales rose 33% from $4.2 million to $5.6 million (facilities increased from 18 to 22), franchise fees (encompassing 121 locations) were $2.5 million and company-operated Fuddruckers (61 locations) added $32 million to the top line.
The future: Management indicated during fiscal 2012 that it plans to add 3 to 5 company-owned Fuddrucker locations as well as one combination Luby’s/Fuddruckers standalone facility. Franchisees are expected to open between five and ten new Fuddrucker locations, including one joint venture restaurant in Mexico. Management is proud of the fact that it has been able to reduce its debt an impressive 60%, from $51.3 million to $21.5 in just one year, while extending its credit facility another three years. Capital expenditures are anticipated to eat up $15 to $20 million, with the majority of the funding slated for new openings.
The bottom line: The company reiterated its caution on the economy, but this “crutch” is beginning to get a bit tiring, especially considering the fact that several restaurant chains are actually flourishing in this environment, as evidenced by YUM, MCD and CMG all seeing their share prices climb double digits on the year, compared to LUB’s 30% bloodletting. The fact is, this one is could be vulnerable as a private equity play (reminiscent of Apollo Group’s recent successful acquisition of CKR) due to its squeaky clean balance sheet, recent market cap implosion and the hidden value of its real estate holdings.
The question is, will management’s 16% ownership stake be enough to thwart off an unwanted suitor? It is safe to say that the agonizing slow pace of the company’s turnaround is causing some impatient shareholders to hunger for a more short-term approach (mainly a buyout scenario) to getting the stock price to more realistic levels, such as Capstone's one year price target of $6.80, representing more than a 50% premium.