Luby's reports fiscal Q2 net loss of US$2.2M, compared to year-ago earnings of US$180,000; total sales rise 2.9% to US$89.5M

Nevin Barich

HOUSTON , March 24, 2014 (press release) – Luby's, Inc. (NYSE: LUB) ("Luby's") today announced unaudited financial results for its twelve-week second quarter fiscal 2014, which ended on February 12, 2014.

Chris Pappas, President and CEO, remarked, "We are pleased to have opened four new restaurants in the second quarter and one new Fuddruckers that was converted from a Cheeseburger in Paradise restaurant, our largest number of openings in a single quarter. At the half way mark in our fiscal year, we have opened five new restaurants and converted one existing restaurant. We now anticipate a total of 10 new restaurants by the end of fiscal 2014 – at the high end of our previous range of 8 to 10 new restaurants during fiscal 2014. In addition to these 10 new restaurants, we anticipate converting seven Cheeseburger in Paradise restaurants to Fuddruckers. Our new and relocated restaurants are performing well and generating our expected returns. We are especially pleased with our side-by-side Luby's and Fuddruckers locations. Our third side-by-side configuration opened last week in Austin, Texas and we anticipate that our guests in that market will embrace two restaurant brands at a single destination.

"At Luby's Cafeterias, same-store sales showed considerable strength, rising 4.4% as reported and increasing 1.2% when adjusted for the Thanksgiving holiday calendar shift. Year-to-date, same-store sales at our cafeterias are up 1.8% based on our on-going focus on finding ways to serve our guests better. Again in the second quarter, we demonstrated steady operating performance at our core Luby's Cafeterias and Fuddruckers brands, generating margins of 13.4%, a slight decline compared to 13.5% in the comparable quarter last year.

"At Fuddruckers, our franchise pipeline continues to grow and we are especially pleased with the international growth of the Fuddruckers system. So far this year, we have signed three international development agreements, one for up to 10 units in Panama and Aruba, a second for up to 10 units in Chile and a third for up to 10 units in Italy, Poland and Switzerland.

"Additionally, we have launched a plan focused on improving cash flow from the acquired Cheeseburger in Paradise leasehold locations. Out of the originally acquired 23 locations, so far we have closed six locations. One of these six locations was re-opened as a Fuddruckers in the second quarter, three more of these six locations are currently under construction and will re-open as a Fuddruckers before the end of fiscal 2014. We will dispose of the remaining two locations. From the remaining 17 Cheeseburger in Paradise locations operating today, we will have up to an additional five conversions to Fuddruckers by the end of fiscal 2014 as well as two disposals."

Leasehold Locations from Cheeseburger in Paradise Acquisition

Total company same-store sales increased 2.5% in the second quarter. Adjusting for the calendar shift relating to the timing of Thanksgiving, total company same-store sales rose 0.1%. Due to a year-over-year calendar shift, the second quarter fiscal 2014 included the Wednesday prior to Thanksgiving whereas, in fiscal 2013, the Wednesday prior to Thanksgiving was the last day of the first fiscal quarter. Same-store sales at Luby's Cafeterias rose 4.4%. Excluding the impact of the calendar shift, same-store sales increased 1.2% at Luby's Cafeterias as customer traffic grew 1.0% and the average spend per customer increased 0.2%. Fuddruckers same-store sales declined 2.7%, as a 3.9% decline in customer traffic was partially offset by an average spend per customer increase of 1.3%. In addition, we estimate that weather events reduced Luby's Cafeteria same-store-sales by 0.7% and Fuddruckers sales by 1.5%. These estimates reflect stores in certain markets on specific days that realized significantly reduced sales or were closed altogether due to the weather conditions.

Restaurant Sales (In thousands)

Restaurant sales rose to $83.9 million, compared to $81.7 million in the prior fiscal year's second quarter. Luby's Cafeteria sales increased $2.6 million and sales from locations where we have a side-by-side Luby's Cafeteria and Fuddruckers ("combo" location) increased $0.4 million. These sales increases were offset by a decline in sales at Fuddruckers locations of $0.8 million. The sales increase at Luby's Cafeterias was due to a 4.4% increase in same store sales and the incremental sales contribution from one new store, partially offset by the absence of sales from one closed store. The sales decline at Fuddruckers was due to a 2.7% decrease in same store sales and the absence of sales from two closed stores, partially offset by the incremental sales for three stores that opened during the second quarter of fiscal 2014.

Franchise revenue of $1.5 million in the second quarter fiscal 2014 was the same as the prior fiscal year's second quarter.

Revenue from Culinary Contract Services increased to $4.0 million compared to $3.7 million in the same quarter last fiscal year. We ended the second quarter fiscal 2014 operating 22 facilities, an increase from 18 facilities at the end of the second quarter fiscal 2013.

Store level profit, defined as restaurant sales less food costs, payroll and related costs, other operating expenses, and occupancy costs, was $9.3 million, or 11.0% of restaurant sales. Removing the impact of Cheeseburger in Paradise, store level profit was $10.2 million, or 13.4% of restaurant sales. In the prior fiscal year's second quarter, store level profit was $10.0 million, or 13.5% of restaurant sales, after removing the impact of Cheeseburger in Paradise. Store level profit is a non-GAAP measure and reconciliation to income from continuing operations is presented after the financial statements.

We produced a loss from continuing operations of $2.1 million, or a loss of $0.07 per share, compared to income from continuing operations of $0.6 million, or $0.02 per diluted share, in the same quarter last fiscal year. Results in fiscal 2014 and fiscal 2013 included various special items. Excluding special items and the loss from Cheeseburger in Paradise, second quarter fiscal 2014 income from continuing operations was $0.2 million or $0.01 per diluted share, compared to a income from continuing operations of $47,000, or $0.00 per share in the second quarter fiscal 2013.

Reconciliation of income (loss) from continuing operations to income from continuing operations, before special items (1,2)

Second Quarter Fiscal 2014 Operating Expense Review

Food costs as a percentage of restaurant sales rose slightly to 29.0% in the second quarter fiscal 2014 from 28.9% in the comparable quarter last fiscal year, primarily due to higher food and beverage costs at Cheeseburger in Paradise. Excluding the impact of Cheeseburger in Paradise, our food cost as a percentage of restaurant sales of 28.8% in the second quarter fiscal 2014 was the same as the second quarter fiscal 2013 as we continued to manage our food costs as a result of careful management as modest commodity price increases were offset by select menu price increases and higher average spend per customer.

In the second quarter fiscal 2014, payroll and related costs as a percentage of restaurant sales declined to 35.4% from 35.6% in the prior fiscal year second quarter. Excluding the impact of Cheeseburger in Paradise, payroll and related costs as a percentage of restaurant sales decreased 0.7% to 34.5% in the second quarter fiscal 2014 compared to 35.2% in the comparable quarter in the prior fiscal year. This decline was primarily due to improved labor deployment management with continued progress on matching labor schedules with anticipated daily guest traffic.

Other operating expenses include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, supplies, and services. As a percentage of restaurant sales, other operating expenses were 18.6% compared to 17.2% in the second quarter fiscal 2013, due in part to the addition of Cheeseburger in Paradise as well as higher insurance, marketing and advertising, supplies and repairs and maintenance costs. Excluding Cheeseburger in Paradise, other operating expenses as a percent of restaurant sales were 17.9% in the second quarter fiscal 2014, an increase of 1.1% from 16.8% the same quarter last fiscal year. Approximately half of the increase in operating expenses reflects increased marketing and advertising expenditures aimed at supporting our brand awareness and driving incremental guest visits over the long term. Other increases included higher property insurance costs, packaging supplies, repairs and maintenance expense, and electricity and gas utility expense.

Occupancy costs include property lease expense, property taxes, and common area maintenance charges. Occupancy costs were $5.0 million in the second quarter fiscal 2014 compared to $4.9 million in the comparable period of the prior fiscal year.

Depreciation and amortization expense increased $0.2 million to $4.5 million in the second quarter fiscal 2014 compared to the second quarter fiscal 2013 due to the increase in the depreciable asset base from recent new store construction and equipment and remodel activity, partially offset by certain assets coming to the end of their depreciable lives.

General and administrative expenses increased to $8.1 million in the second quarter fiscal 2014 from $7.7 million in the second quarter fiscal 2013. As a percentage of total revenues, general and administrative expenses rose to 9.1%, compared to 8.8% in the second quarter fiscal 2013. The increase in general and administrative support included higher outside professional services, computer network costs, and corporate travel expense in part supporting the early stages of our restaurant unit count growth and franchise pipeline development.
Balance Sheet and Capital Expenditures

At the end of the second quarter fiscal 2014, we had $1.7 million in cash, and $173.9 million in shareholders' equity. We ended the second quarter with a $37.0 million outstanding debt balance. During the first two quarters of fiscal 2014, our capital expenditures totaled $19.1 million and included investments of $7.8 million on new unit development, $4.7 million on the purchase of land, $2.6 million on remodeling of existing restaurants, and $4.0 million for ongoing maintenance and technology infrastructure.

Fiscal Year to Date:

Luby's generated restaurant sales of $164.9 million during the first two fiscal quarters of 2014, up from $155.7 million in the comparable quarters in the prior fiscal year.

Luby's Culinary Contract Services revenue rose to $8.2 million during the first two quarters of fiscal 2014, compared to $7.5 million last year. Operating profits, before general and administrative expenses, for this service line rose to $1.1 million in the first two quarters of 2014, compared to $0.7 million in the comparable quarters in the prior fiscal year.

Store level profit of $18.2 million, or 11.0% of restaurant sales, declined from $19.8 million, or 12.7%, in the prior fiscal year's first two quarters.

2014 Outlook

We are reiterating the sales guidance that was provided in our fourth quarter fiscal 2013 earnings press release, including same-store sales growth of up to 1% in fiscal 2014 from fiscal 2013 levels. Total restaurant sales, including same-store sales plus the contribution from new store openings, offset by store closings, are expected to be in the range of $375 million to $385 million. New stores openings, excluding Cheeseburger in Paradise locations that are converting to Fuddruckers, in fiscal 2014 are expected to contribute more than $8 million to total restaurant sales. As we execute our plans to convert several Cheeseburger in Paradise locations to Fuddruckers, we expect a negative impact to sales and cash flow in the current fiscal year. Sales will be impacted by a 60 to 90 day latency period while we close and refashion the stores; cash flow will be negatively impacted as we incur costs to close certain Cheeseburger in Paradise locations and incur costs to re-open these locations as Fuddruckers. This outlook is sensitive to changes in economic conditions and the effects of other risks and uncertainties described in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 12, 2013.

For fiscal 2014, we expect to achieve the following restaurant development milestones:

A total of 11 new restaurants. Year to date through the second quarter, we have opened six new restaurants (2 Luby's Cafeterias and 4 Fuddruckers); by year end fiscal 2014, we anticipate having opened at least five additional new restaurants (2 Luby's Cafeterias and 3 Fuddruckers).

At least two additional restaurant construction starts for fiscal 2015 openings.

Up to 10 remodel projects. During the first two quarters of fiscal 2014, we have completed five remodel projects.

6 Cheeseburger in Paradise to Fuddruckers conversions. One was completed in the second quarter fiscal 2014.

We anticipate investing approximately $35 million to $40 million in capital expenditures in fiscal 2014, including $16 million for restaurant openings and beginning construction in fiscal 2014 for fiscal 2015 openings, up to $6 million in restaurant remodels, and $11 million to purchase parcels of land for new restaurant development; the balance of projected capital expenditures include on-going maintenance of our restaurant properties and equipment and technology infrastructure investments.

Conference Call

Luby's will host a conference call today, March 24, 2014, at 10:00 a.m., Central Time, to discuss further its second quarter fiscal 2014 results. To access the call live, dial (480) 629-9692 and ask for the Luby's conference call at least 10 minutes prior to the start time, or listen live over the Internet by visiting the events page in the investor relations section of www.lubysinc.com. For those who cannot listen to the live call, a telephonic replay will be available through March 31, 2014 and may be accessed by calling (303) 590-3030 and using the pass code 4673273#. Also, an archive of the webcast will be available after the call for a period of 90 days on the "Investors" section of the Company's website.

About Luby's

Luby's, Inc. operates restaurants under the brands Luby's Cafeteria and Fuddruckers and provides food service management through its Luby's Culinary Services division. The company-operated restaurants include 95 Luby's Cafeterias, 67 Fuddruckers restaurants, 17 Cheeseburger in Paradise full service restaurants and bars, one Koo Koo Roo Chicken Bistro, and one Bob Luby's Seafood Grill. Its 95 Luby's Cafeterias are located primarily in Texas. In addition to the 67 company-operated Fuddruckers locations, Luby's is the franchisor for 112 Fuddruckers franchise locations across the United States (including Puerto Rico), Canada, Mexico, and the Dominican Republic. Luby's Culinary Services provides food service management to 26 sites consisting of healthcare, higher education and corporate dining locations.

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