Luby's (LUB) CEO Chris Pappas on Q1 2016 Results - Earnings Call Transcript

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

Luby's Inc., (NYSE:LUB)

Q1 2016 Earnings Conference Call

January 22, 2016, 11:00 ET

Executives

Steve Goodweather - VP, Financial Planning & IR

Chris Pappas - CEO & President

Scott Gray - CFO & SVP

Analysts

Greg Good - FD's Grillhouse

Operator

Welcome to the Luby's Fiscal 2016 First Quarter Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce Steve Goodweather, Vice President of Financial Planning and Investor Relations. Thank you, please go ahead.

Steve Goodweather

Thank you and again, welcome everyone to Luby's 2016 fiscal first quarter earnings conference call. This call is also being webcast and can be accessed to the audio link on Luby's website, Lubysinc.com.

Information recorded on this call speaks only as of today, January 22, 2016. 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 as well as plans for expansion of the company's business, including the expected financial performance of the Company's pro type restaurants 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.

Before we get started today I would like to remind everyone that we stated -- at least stated in our press release that first quarter this year included 16 weeks whereas last year's first quarter included 12 weeks.

So for comparison purposes during this call we will comment on results comparing first quarter results to the same 16 weeks last year. The change in the length of quarters was done, in part, to minimize the Thanksgiving calendar shift by extending the first fiscal quarter until after Thanksgiving.

With that I will now turn the call over to Luby's President and CEO, Chris Pappas. Chris?

Chris Pappas

Thanks, Steve. Good morning, everyone and thank you for all joining us in this first quarter call. With me today are Scott Gray, our Chief Financial Officer and Peter Tropoli, our Chief Operating Officer. In the first quarter we performed well across all our brands, same-store sales were up Companywide by 1.4% with Luby's and Fuddruckers sales up by 1.2% and 1.3%, respectively and Cheeseburger in Paradise sales up by 5.5%.

At our combo locations, sales increased by $0.2 million in the first quarter due to the addition of our six combo location. It was offset by a net decrease in sales at our other combo locations as two have come off their honeymoon phase of being open just over a year. Combo locations together represent 6.2% of total restaurant sales in the first quarter.

We also lowered our Company expense run rate during the quarter in all of our major expense line items. By increasing same-store sales and lowering costs we increased our store level profit to 14.8% compared to 12.8% in the comparable period last year. This improvement led to an EBITDA growth of more than $2.4 million.

EBITDA for the quarter was $5.7 million compared to $3.3 million during the same 16 weeks last year. We opened two new Company-owned Fuddruckers restaurants in the quarter and franchisees opened six new Fuddruckers restaurants in the international markets of Italy, Colombia and Mexico, as well as domestically in Michigan, California and Florida.

This quarter marked the greatest number of Fuddruckers franchisee openings in a single quarter since we acquired the Fuddruckers brand in 2010. In the culinary contract services business, we opened five new locations in the first quarter. We now operate 28 locations. Additionally we're currently in advanced discussions to partner with a large hospital operator to provide our high-quality offerings at multiple locations. Our culinary services development pipeline remains robust.

We're also actively looking for our next combo site for potential development in southern U.S. markets, where we do not already operate Luby's Cafeterias. In our franchise pipeline, we estimate at least six new Fuddrucker openings through the rest of fiscal 2016, in addition to the six already opened during the first quarter. So we're expecting at least 12 total Fuddruckers franchisee openings for the full year.

We're pleased with the positive momentum and increased operational performance at each of our brands. Our teams are executing better at the store level, in large part due to the initiatives we started in 2015. As we discussed before, our strategy is to drive value by achieving operational excellence through our leadership development and trained into realized efficient cost management to grow profitability and enhance shareholder value.

In the first quarter we made significant progress toward this goal. While the stock market and certain economic trends are certainly creating challenges in the macro environment, we're focused on operating at the highest levels possible to improve our results and satisfy our guests. Continuing our current momentum throughout 2016, we expect to generate positive net income in the second half of the year.

I'll now turn the call over to our CFO, Scott Gray, to review key financial metrics for the first quarter of fiscal 2016. Scott?

Scott Gray

Thanks, Chris. Before I get started, please note that we have posted an investor presentation on our website, Lubysinc.com, under Investor Relations in our Events section. The presentation contains some additional information we believe will be helpful to investors.

Total Company sales for the quarter increased $1.3 million to $120.7 million over last year, primarily driven by a $2.4 million increase in restaurant sales due to increased same-store sales and new unit sales offset by a decline in culinary contract service revenue of $1 million. Store level profit was $16.8 million in the first quarter or 14.8% of restaurant sales, up from 12.8% last year and up sequentially from 14.2% last quarter. Lower cost as a percentage of restaurant sales in all store level cost categories contributed to our improved store level profitability in the quarter.

Food cost as a percentage of restaurant sales was held by modest price increases and moderating food commodity costs. Notably, Fuddruckers beef costs declined by more than 15% over the prior year. Payroll and related costs declined 10 basis points due to an increase in same-store sales, a reduction in workers compensation expense and continued efficiencies in scheduling hourly restaurant team members. Lower utility expense and repairs and maintenance activity accounted for much of the improvement and other operating expenses which were down 80 basis points year over year.

In our culinary contract services business segment, our revenues decreased to $4.9 million with 28 operating locations this year compared to $5.9 million last year with 26 operating locations. This decrease was the result of higher sales volume locations ceasing operations over the past 12 months which were replaced by lower volume locations.

Culinary segment profit was 10% of culinary contract service sales this year in the first quarter and 10.3% last year. Both quarters exceeding our profit target of 7% to 9% for this business segment. Turning to our Fuddruckers franchised business segment, revenue was $2.1 million this year, consistent with the prior 16 weeks last year.

As we have continued to add development agreements to our Fuddruckers franchise pipeline, our balance sheet reflects $1.8 million in deferred franchise revenues outstanding as of quarter end. We expect to recognize these fee amounts as new franchise units open up over the coming years. The projected franchise openings which have grown by 44 units sold over the last 12 months are listed by location on page 16 in our investor pack.

The positive sales momentum, combined with store level operating -- lower store level operating expenses and reduced costs associated with opening stores all led to the $2.4 million increase in EBITDA that Chris previously discussed. The improvement in EBITDA represents a 70% increase over the comparable 16 weeks from the prior year. The significant increase in EBITDA occurred despite some significant investments in marketing and advertising in the quarter.

Moving on to our balance sheet, in the first quarter we paid down $2.5 million of our revolving credit facility and ended the quarter with a debt balance of $35 million. During the first quarter, we invested $5.7 million in capital expenditures and remain on pace to invest approximately $20 million in 2016, excluding any land purchased for future development.

Trailing full-year EBITDA improved as of the end of the quarter by $5 million from $15.5 million in the prior year to $20.5 million as of the most recent trailing full year period. EBITDA growth momentum is evident in this comparison. This $5 million trailing full-year EBITDA improvement year over year is a result of the steps taken by management to stabilize the Cheeseburger in Paradise locations through focusing on the best eight locations, the closing, sale or conversion of underperforming locations, as well as the result of many initiatives Chris spoke about leading to sales growth and cost control. We're delighted to report these improved EBITDA results and wish to thank all employees that contributed to this quarter's results.

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

Chris Pappas

Thanks, Scott. Our goal is to generate consistent and sustainable same-store sales growth. With positive same-store comps at the end of 2015 we're pleased to have continued that momentum with positive same-store sales in the first quarter of 2016. Building on the operational initiatives we began in 2015 and with long-standing commitments to our guest satisfaction, we have a positive outlook for sales in 2016.

We also believe that our price and value proposition and positioning within popular sectors of the market will allow our brands to grow. As I mentioned earlier we're focused on the long-term value of our Company which include sustainable growth of our mature brands, developing our franchisees and our culinary contract services segment and prudently managing cost Companywide to enhance our profitability.

During the past two years we received a number of growth initiatives that have better stabilized our operating results and financial position. We balanced our capital-intensive investments in new restaurants with the growth of our capital-light business segments that include our franchisees and culinary contract services. Today, our franchisee pipeline and culinary pipeline are both well-positioned for growth.

In fiscal 2016, we're focused on continuing to improve cash flows and EBITDA. Our team and I are not pleased with how the market is currently valuing the Company as evidenced by the stock price, but I am confident that in the direction and initiatives being executed by all of our teams that those are the keys to growing EBITDA to increase our shareholder value.

Operator, we're now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Greg Good with FD's Grillhouse. Please proceed with your questions.

Greg Good

My question relates to the cafeteria investments. The Company has roughly 70 cafeterias that do not pay rent, each unit $150,000 to $200,000 per year. Somewhere in the $10 million to $14 million a year in annual savings yet the cafeterias are not profitable. My question is why the continued investment in building cafeterias? Thank you.

Scott Gray

As you mentioned the cafeterias are a large portion of the Company's store level profit and our largest business segment as Company-operated restaurants. So we have a number of cafeterias that are profitable on a unit-by-unit basis. We have very few that are negative cash flow -- actually zero in the quarter if I'm not mistaken.

So we feel that that business segment is very much a big part of what our Company is based on and stability of the Company. You do mention that there are a number that are owned assets versus rented and that's just how we have those units positioned to run. We can be able to control the location better by owning the land versus leasing.

So we're confident in the Luby's Cafeteria model. And what we've done is taken that and combined it with Chris's leadership and our team in terms of combining it with -- having another product line with Fuddruckers hamburgers added to our combo locations. So we're able to offer our guest and experience that not only includes the traditional homestyle cooking cafeterias which also really meets very well with today's trends on healthy eating, we also have a burger offering to offer the guest. So, hopefully, you will continue your interest in Luby's and we look forward to going forward with the initiatives we've got in place.

Operator

I would now like to turn the call back to Mr. Pappas.

Chris Pappas

Thank you all for joining us today and we look forward to speaking with you again next quarter.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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