Luby's reports fiscal Q3 net earnings of US$1.7M, down 32% from year-ago period; total sales rise 0.9% to US$97.2M

Nevin Barich

HOUSTON , June 13, 2014 (press release) – Luby's, Inc. (LUB) ("Luby's") today announced unaudited financial results for its twelve-week third quarter fiscal 2014, which ended on May 7, 2014.

Chris Pappas, President and CEO, remarked, "We are pleased with our results in the third quarter including continued same-store sale growth at our core Luby's Cafeterias. We opened 3 new restaurants during the quarter and we continued to enhance our brand building initiatives.

"Our Luby's Cafeterias generated strong same-store sales growth of 2.0% in the third quarter driven entirely by increases in guest traffic. We are also especially pleased with our side-by-side Luby's and Fuddruckers locations which have all been well received. We have opened three side-by-side locations, totaling six new restaurants.

"We continue to execute on our new restaurant development plans, opening seven new restaurants (excluding openings related to converted restaurants) so far in fiscal 2014. By early Fall 2014, we will open two more side-by-side Luby's and Fuddruckers locations and at least two more stand-alone Fuddruckers.

"Our brand initiatives, which include enhanced restaurant performance plans at Fuddruckers and converting several Cheeseburger in Paradise restaurants to Fuddruckers locations, are gaining traction. During the quarter we continued our guest engagement activities at Fuddruckers and ensured that we retained our everyday value pricing to build long term guest loyalty and frequency. At Cheeseburger in Paradise, we have already converted two locations to Fuddruckers restaurants with a third conversion opening later this month. Two additional locations are undergoing conversions currently with plans to re-open later this summer."

Same-Store Sales Year-Over-Year Comparison:

Restaurant sales rose to $90.9 million, compared to $90.5 million in the prior fiscal year's third quarter. Luby's Cafeterias sales increased $1.3 million and sales from locations where we have a side-by-side Luby's Cafeteria and Fuddruckers ("Combo" location) increased $1.7 million. These sales increases were offset by a decline in sales at Fuddruckers locations of $0.6 million and a sales decline at Cheeseburger in Paradise of $2.0 million. The sales increase at Luby's Cafeterias resulted from a 2.0% increase in same-store guest traffic, and the incremental sales contribution from one new Luby's Cafeteria; those additions were partially offset by the absence of sales from two closed Luby's Cafeterias. The increase in sales at our combo locations is due to the addition of two new combo locations, as well as a 2.2% increase in sales at our first such location. The decline in sales at our Fuddruckers restaurants resulted from a 3.6% decrease in same-store guest traffic, a modest 0.3% decrease in per person average spend, and the absence of sales from two closed locations. Those declines were partially offset by the sales contribution from three new Fuddruckers restaurants.

Franchise revenue was $1.7 million in the third quarter fiscal 2014 compared to $1.6 million in the prior fiscal year's third quarter.

Revenue from Culinary Contract Services increased to $4.5 million compared to $4.1 million in the same quarter last fiscal year. We ended the third quarter fiscal 2014 operating 26 facilities, an increase from 19 facilities at the end of the third quarter fiscal 2013.

Store level profit, defined as restaurant sales less food costs, payroll and related costs, other operating expenses, and occupancy costs, was $13.5 million, or 14.8% of restaurant sales.
Removing the impact of Cheeseburger in Paradise, store level profit was $13.3 million, or 16.1% of restaurant sales. In the prior fiscal year's third quarter, store level profit was $13.2 million, or 16.5% 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 income from continuing operations of $1.7 million, or $0.06 per share, compared to income from continuing operations of $2.7 million, or $0.09 per diluted share, in the prior fiscal year's third quarter. Results in fiscal 2014 and fiscal 2013 included various special items. Excluding special items and the loss from Cheeseburger in Paradise, third quarter fiscal 2014 income from continuing operations was $1.3 million, or $0.04 per diluted share compared to third quarter fiscal 2013 income from continuing operations of $3.0 million, or $0.10 per diluted share.

Third Quarter Fiscal 2014 Operating Expense Review

Food costs as a percentage of restaurant sales were 28.6% in the third quarter fiscal 2014 and in the comparable quarter last fiscal year. Excluding the impact of Cheeseburger in Paradise, our food cost as a percentage of restaurant sales was 28.4% in the third quarter fiscal 2014. Commodity price increases were mostly offset by efforts to effectively manage the mix of menu offerings and careful food cost control.

In the third quarter fiscal 2014, payroll and related costs as a percentage of restaurant sales declined to 33.3% from 33.6% in the prior fiscal year's third quarter. This decline was primarily due to improved labor deployment management with continued progress on matching labor schedules with anticipated daily guest traffic as well as lower workers' compensation and state payroll tax expense. Excluding the impact of Cheeseburger in Paradise our payroll and related costs as a percentage of restaurant sales was 33.0% in the third quarter fiscal 2014.

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 17.8% in the third quarter fiscal 2014 compared to 17.4% in the third quarter fiscal 2013. The increase was due to higher utility and insurance expenses and higher marketing expenses offset by lower repairs and maintenance expense as a percentage of restaurant sales. Excluding the impact of Cheeseburger in Paradise, our other operating expenses as a percentage of restaurant sales was 17.3%.

Occupancy costs include property lease expense, property taxes, and common area maintenance charges. Occupancy costs were $4.9 million in the third quarter fiscal 2014 and $5.0 million in the comparable period of the prior fiscal year. Excluding the impact of Cheeseburger in Paradise, our Occupancy costs were $4.2 million in the third quarter of fiscal 2014 and in the comparable quarter last fiscal year.

Depreciation and amortization expense increased $0.5 million to $4.7 million in the third quarter fiscal 2014 compared to the third 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 $8.3 million in the third quarter fiscal 2014 from $7.2 million in the third quarter fiscal 2013. As a percentage of total revenues, general and administrative expenses rose to 8.6% in the third quarter fiscal 2014, compared to 7.5% in the third quarter fiscal 2013. The increase in general and administrative support included higher outside professional service fees, 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 third quarter fiscal 2014, we had $1.8 million in cash and $176.0 million in shareholders' equity. We ended the third quarter fiscal 2014 with a $36.0 million outstanding debt balance and $20.0 million available under our credit facility. During the first three quarters of fiscal 2014, our capital expenditures totaled $31.1 million and included investments of $13.7 million on new unit development, $7.6 million on the purchase of land, $4.9 million on remodeling of existing restaurants, and $5.9 million for ongoing maintenance and technology infrastructure.

Fiscal Year to Date:

Restaurant sales rose to $255.1 million during the first three fiscal quarters of 2014, up from $245.8 million in the comparable quarters in the prior fiscal year.

Culinary Contract Services revenue rose to $12.8 million during the first three quarters of fiscal 2014, compared to $11.6 million in the comparable quarters in the prior fiscal year.
Operating profits, before general and administrative expenses, for this service line rose to $1.6 million in the first three quarters of 2014, compared to $1.2 million in the comparable quarters in the prior fiscal year.

Store level profit in the first three fiscal quarters of 2014 was $31.8 million, or 12.5% of restaurant sales, a decrease from $33.3 million, or 13.6%, in the comparable quarters in the prior fiscal year.

2014 Outlook

We now expect same-store sales growth of "up to 0.5%," a revision from our previous guidance of "up to 1.0%." Total restaurant sales, including same-store sales plus the contribution from new store openings, offset by store closings, is now expected to be on the lower end of our total restaurant sales guidance range of $375 million to $385 million. 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.

We anticipate investing up to $42 million in capital expenditures in fiscal 2014, including up to $18 million for restaurant openings and beginning construction in fiscal 2014 for fiscal 2015 openings, up to $6 million in restaurant remodels and conversions, and up to $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. In fiscal 2015, excluding land purchases, we currently expect to have capital expenditures of approximately $25 million, compared to approximately $30 million in fiscal 2014. 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 for the fiscal year ended August 28, 2013 filed with the Securities and Exchange Commission on November 12, 2013.

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

At least nine new restaurants -- in line with our expectations at the beginning of the fiscal year for eight to ten new restaurants. Year to date through the third quarter, we have opened seven new restaurants (one stand-alone cafeteria, two stand-alone Fuddruckers, and two combo locations). By year end fiscal 2014, we anticipate opening at least one additional combo location, which will add another Luby's Cafeteria and Fuddruckers restaurant.

At least two additional restaurant construction starts for fiscal 2015 openings, consistent with prior expectations.

Up to seven remodel projects, revised from our previous expectation of up to ten remodel projects. During the first three quarters of fiscal 2014, we have completed six remodel projects.

Four completed Cheeseburger in Paradise to Fuddruckers conversions, revised from our previous expectation of seven conversions by fiscal year end 2014. Two conversions have been completed and the restaurants are now open as Fuddruckers; two additional locations will be completed and open before the end of fiscal 2014.

Conference Call

Luby's will host a conference call tomorrow, June 13, 2014, at 9:00 a.m., Central Time, to discuss further its third quarter fiscal 2014 results. To access the call live, dial (719) 325-2376 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 June 20, 2014 and may be accessed by calling (719) 457-0820 and using pass code 9286303#. 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 93 Luby's Cafeterias, 67 Fuddruckers restaurants, 15 Cheeseburger in Paradise full service restaurants and bars, and one Bob Luby's Seafood Grill. Its 93 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, Dominican Republic, and Italy. Luby's Culinary Services provides food service management to 26 sites consisting of healthcare, higher education and corporate dining locations.

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