Luby's (LUB) CEO Christopher Pappas on Q3 2016 Results - Earnings Call Transcript

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

Luby's, Inc. (NYSE:LUB)

Q3 2016 Earnings Conference Call

July 8, 2016 11:00 am ET

Executives

Steve Goodweather - VP, Financial Planning and Analysis and Investor Relations

Christopher J. Pappas - President and CEO

Scott Gray - SVP, CFO and Treasurer

Analysts

Presentation

Operator

Greetings and welcome to Luby's Fiscal 2016 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Steve Goodweather, Vice President, Financial Planning and Investor Relations. Mr. Goodweather, you may now begin.

Steve Goodweather

Thank you, and again, welcome everyone to Luby's 2016 fiscal third quarter earnings conference call. This call is also being Webcast and can be accessed through the audio link on Luby's Web-site, lubysinc.com. Information recorded on this call speaks only as of today, July 8, 2016.

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, change 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 proceeding, I'd like to mention that the third quarter results for 2016 represent a 12-week period from March 10 to June 1. However, our prior year fiscal third quarter ended on May 6, 2015. So, for our year-over-year comparison purposes, we will at times reference a comparable prior year 12-week period that ended June 3, 2015. This is also depicted on the charts in our press release.

With that, I would like to 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 today's conference call. With me today are Scott Gray, our Chief Financial Officer, and Peter Tropoli, our Chief Operating Officer.

During the quarter, we continued to make progress on store level initiatives to delight our guests and enhance store level performance across all our brands. We believe the initiatives and the team we have in place are performing well and leading us to achieve our long-term goals.

Restaurant sales grew $2.8 million for the first three fiscal quarters of 2016 compared to the same 40-week period of fiscal 2015. Total same-store sales increased 1% during the same time period and store level profit was up to 14.9% compared to 14%. Adjusted EBITDA also improved year to date for the first 40 weeks of fiscal 2016 to $15.8 million, an increase of 11% compared to the same 40 weeks in fiscal 2015.

For the third quarter, total same-store sales decreased 0.6%. While the decline is disappointing, we are pushing hard to improve our sales. We are encouraged by the strong increase in guest traffic at Luby's Cafeterias during the quarter, and in our largest market, Texas, our sales declined only 0.4% despite having heavy rains throughout April and May, some of which caused severe flooding conditions and shut down entire sections of Houston and Dallas.

Pressure on consumer spending appears to be impacting overall restaurant guest traffic and competitors' same-store sales results. Many sectors of the restaurant industry are reporting declines in same-store sales. We believe we experienced some of that pressure in the third quarter also. However, at Luby's, guest traffic was up 3.7% and year to date we have maintained positive total same-store sales comps at each of our restaurant brands, Luby's Cafeteria, Fuddruckers and Cheeseburger in Paradise.

The 3.7% traffic growth at Luby's was offset by a 3.9% decline in average spend per guest. The increase in guest traffic was driven in large part from some targeted offers to our most loyal eClub guests. Given the current economic environment, our guests were very receptive to these offers, including 'buy one and get one' offers and other value-oriented offers that were planned for a particular day of the week in order to motivate increased frequency of visits.

During the quarter, we also opened four new Fuddruckers franchise restaurants and opened a fifth location in early June at the beginning of our fourth quarter. Three U.S. franchise locations opened in the quarter, two in Virginia, that being Norfolk and Ashland, and one in Amarillo, Texas. Our international opening was in Bologna, Italy. And then in June, early in our fourth quarter, we opened another international location in the city of Bogota, our second franchise location in Colombia.

Fuddruckers is a worldwide brand that continues to grow in popularity, both here in the United States and around the world. Our franchise pipeline is growing and we are excited about the continued growth of this brand.

We also continued to develop new menu items that speak to the ever-evolving guest preferences. For instance, at Fuddruckers, we're now offering our [Power] [ph] Kale Salad and our Refresh Cobb Salad, but it's hamburgers that still rank supreme and we've been offering a Double Stack Cheeseburger that has a terrific future.

At Luby's, [all the usual] [ph] favorites are still on the menu and we are continuing to emphasize these items, but we also rotate management specials throughout the week. One day of the week we'll have an Asian Stir Fry, another day we'll highlight our Pasta Lovers dishes. It's always in a changing mode.

We're confident in our team and our Company-wide plans to enhance future profitability. Throughout, our initiatives are focused on the guest experience. Team members and leaders are continually being developed, trained and tested to improve guest service and strengthen the hospitality culture across all of our brands. These efforts contribute to guest traffic growth, increased frequency of visits, leading to same-store sales growth. All of these items support our goal of improving store level profit and driving EBITDA growth.

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

Scott Gray

Thank you, Chris. Before I get started, please note that we have posted our usual investor presentation on our Web-site at lubysinc.com. It can be found under the Investor Relations section, under Events. The presentation contains some additional information that we believe will be helpful to our investors.

Total Company restaurant sales decreased $1.3 million to $86.5 million in the third quarter compared to last year's comparable 12 week period, primarily due to the less than 1% or 0.6% decrease in same-store sales and due to the loss of revenue from three cafeterias that were closed over the prior year.

It has been a very wet spring and early summer in many parts of the U.S. and especially in Texas this year. As you know, Texas is our largest market for us with Houston also representing our largest concentration of restaurants for both Luby's and Fuddruckers, which is home to 54 units or 30% of our Company-operated restaurants.

To provide some perspective on the rainfall Houston received, year-to-date the city of Houston metropolitan area is 20 inches above its annual rate, and a particular storm in our quarter which was on April 18, was the city of Houston's second wettest day on record with some areas getting 10 to 20 inches of rain. So as a result, we estimate that we lost over 30 operating store days during the third quarter related to this unprecedented weather this year versus last year.

In Texas, our same-store sales for the quarter were negative 0.4. By removing our estimated loss in sales of 400,000 to 500,000, we estimate same-store sales would have been flat to positive.

Despite a 0.2% same-store sales decline in Luby's Cafeterias, as Chris mentioned, guest traffic was up 3.7%, with this guest traffic increase offset by 3.9% decrease in average spend per guest due to the change in menu mix driven by the eClub offerings Chris mentioned earlier. Restaurant sales from our 87 Cafeteria units represented 60% of the total Company restaurant sales in the quarter. Year to date, Cafeteria same-store sales remained positive, up 1.4% over the prior year.

Fuddruckers Hamburgers same-store sales declined 1% in the quarter. However, our 22 Houston area home market Fuddruckers units were up 1.2% adjusted for the weather we mentioned earlier. As similar to Luby's Cafeterias, year to date, Fuddruckers Hamburgers same-store sales are also positive about 0.2%.

Our Cheeseburger in Paradise same-store sales decreased this quarter 0.6%, following two consecutive previous quarters of same-store sales growth in excess of 4%. Year to date, the eight Cheeseburger locations are up 2.9%.

Store-level profit was $13.0 million or 15% of restaurant sales in the third quarter, compared to $14.2 million or 16.1% of restaurant sales during the comparable 12 weeks last year. Lower same-store sales and higher payroll related costs, partially offset by lower cost of food and operating expenses, led to this decrease in profitability.

Food cost in the quarter benefited from a decline in several food commodities categories, but particularly decreases in beef cost. Food commodity cost for our basket of food commodity purchases decreased approximately 3% at Luby's Cafeterias and 8% at Fuddruckers.

Food cost as a percentage of restaurant sales were down 40 basis points compared to the comparable 12-week period last year, despite the limited time offerings that we mentioned. We continue to expect the comparison of certain food commodity cost in the fourth quarter to be favorable over the last year based on current pricing levels.

Moving on to payroll related costs, which increased $1 million or 170 basis points compared to the 12-week period last year, the increase in payroll related cost is primarily related to a decline in same-store sales, higher average hourly wage rates, wages incurred during weather closure days and higher workers' compensation expense and our increased investments in training and leadership development.

With our operating expense line, we benefited from lower utility costs and reduced repairs and maintenance activity, resulting in a $0.6 million year-over-year decrease in our other operating expenses, which were $13.6 million in the quarter compared to $14.2 million in last year's comparable quarter, or as a percentage of restaurant sales, an improvement of about 30 basis points.

In our Culinary Contract Services business segment, revenues increased to $3.9 million with 26 operating locations this year, compared to $3.3 million with 21 operating locations last year. The Culinary segment profit was 9.8% of Culinary sales this year in the third quarter, up from 8.3% in the comparable 12 weeks last year. We continued to exceed our profit targets of 7% to 9% for this business segment.

Turning to our Fuddruckers franchise business segment, revenues decreased 1.2% compared to the same 12-week period last year, in part due to modest declines in overall sales within our franchise network. During the current quarter, we continued to add development agreements to our pipeline for future new Fuddruckers franchise locations.

As of June 1, 2016, our balance sheet reflects $1.8 million in deferred franchise revenues outstanding. We expect to recognize these deferred franchise fees as new franchise units open over the coming years. The franchise pipeline includes over 80 potential future openings that are under development agreements. These are all listed by location on Page 16 in the investor pack.

Selling, general and administrative expenses, which includes our marketing, increased approximately $3 million or 10.2% in the three quarters ended June 1, 2016, compared to the 40-week comparable period ended June 3, 2015. Increases in selling, general and administrative expenses included an approximate $2 million increase in marketing and advertising expense and approximately $0.7 million increase in outside professional service fees, employee moving cost and network infrastructure cost, and a net increase of $0.1 million in salaries and benefits expense, health insurance cost and employee travel cost, and a net $0.2 million increase in corporate supplies and other corporate overhead costs.

The $2 million increase in marketing and advertising expenses is intended to motivate our guest visits, increased frequency of visits and increased overall restaurant brand and Company business segment awareness. This includes sponsorships and partnerships with sports teams that we believe enhance our visibility and appeal within our markets.

Our EBITDA was $19.8 million for the trailing full year three quarters ended this year, which is up $2.8 million from the comparable period last year by 16.7%. So the $19.8 million trailing full year ended quarter three of this year is up $2.8 million from the same period last year as three quarters ended.

Moving on to our balance sheet, under our revolving credit facility, we ended the quarter with a debt balance of $36 million compared to $37.5 million at the end of fiscal 2015. During the third quarter, we invested $3.4 million in capital expenditures and remained on pace to spend less than $20 million in 2016, excluding any potential land purchases for future development.

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

Christopher J. Pappas

Thanks Scott. As we stated before, our goal is to inspire our team members to delight our guests in order to generate consistent and sustainable same-store sales growth and improved store level profit. While the third quarter presented a slight decline to our top line growth, same-store comps have remained positive year to date and we continue to build on the operational initiatives we began in 2015. We believe that our brands present great choices for our guests with excellent food and value pricing at iconic brands known for quality.

We operate in key dining segments of the restaurant space, we have deeply loyal guests, we have a positive outlook for the long term value of our Company which includes sustainable growth of our mature brands developed in our franchisees and Culinary Contract Service segments and effectively managing costs Company-wide to enhance profitability.

Also, we've increased investment in our marketing the Company's brand. Year to date, our marketing spend reported in SG&A is 1.5% of restaurant sales, up from 80 basis points last year. This includes new investments in sports sponsorships with Major League Baseball, NFL and professional soccer, particularly within our core markets in Houston and the state of Texas. We continue to make these investments which we believe are keys to our long-term brand success.

In addition, we continue to consider new and innovative ways to build our brands including experimenting with new digital media campaigns through popular apps like Waze and Pandora. These campaigns will provide us an opportunity to present our guests with targeted advertising right to their mobile devices. More on these efforts as they develop.

In closing, we remain focused on key drivers of our business, to achieve operational excellence of our brands and to efficiently manage cost, to grow profitability and enhance shareholder value.

Operator, we are now ready for questions.

Question-and-Answer Session

[Operator Instructions] At this time, I'll turn the floor back to management for additional comments.

Christopher J. Pappas

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

Operator

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