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LUB > SEC Filings for LUB > Form 10-K on 13-Nov-2012All Recent SEC Filings

Show all filings for LUBYS INC

Form 10-K for LUBYS INC


13-Nov-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and footnotes for the fiscal years ended August 29, 2012 ("fiscal year 2012"), August 31, 2011 ("fiscal year 2011") and August 25, 2010 ("fiscal year 2010"), included in Item 8 of this report.

Overview

In fiscal year 2012, we generated revenues primarily by providing quality food to customers at our 94 Luby's Cafeteria branded restaurants located primarily in Texas and 60 Fuddruckers restaurants located throughout the United States, 3 Koo Koo Roo restaurants in California, and 122 Fuddruckers franchises located primarily in the United States. On July 26, 2010, we became a multi-brand restaurant company with a national footprint through the acquisition of substantially all of the assets of Fuddruckers. The Fuddruckers acquisition added 59 Company-operated restaurants and a franchise network of 130 franchisee operated units. This acquisition further expanded our family-friendly, value-oriented portfolio of restaurants located in close proximity to retail centers, business developments and residential areas. In addition to our restaurant business model, we also provide culinary contract services for organizations that offer on-site food service, such as health care facilities, colleges and universities, as well as businesses and institutions.

In fiscal years 2012 and 2011, we continued to operate our two core brands in the competitive fast casual segment of the restaurant industry. Much of our strategic focus centered around refining our prototype restaurant designs, exploring new avenues for revenue growth, re-investing in our core restaurant models via remodel activity, and supporting our growth initiatives with various marketing techniques.

Since the acquisition of Fuddruckers, we have opened 7 franchise units, four new prototype Company units and acquired 3 units from franchisees. We were able to grow sales at our company operated Fuddruckers restaurants through a combination of local market outreach, upgrading the dιcor of some of our restaurants, and training our restaurant management and crews for the highest level of customer service. Some specific local market outreach programs included partnering with local youth sporting teams, customer surveying, and further establishing relationships with other local businesses so that there is high awareness of the Fuddruckers offerings among their employees and customers. At our Luby's cafeteria brand, we were very encouraged by the full year results of our newest cafeteria that opened at the end of fiscal year 2011. This was a location where we relocated from an in-line shopping center to a newly constructed Luby's prototype on a pad side in the parking lot. The sales at this unit give us further confidence that the Luby's cafeteria brand has broad appeal and generates solid cash flow returns with this prototype at the right location. Through focused efforts, the cafeteria brand also found solid success with growing the catering business, which includes large take-out orders as well as delivery to a customer's location. We continue menu development and innovation at both brands and rotate seasonal offerings throughout the year to generate interest and excitement at our restaurants. Our all-you-can-eat breakfast buffet that we rolled out at a majority of our cafeteria locations in fiscal year 2011 continued to contribute to our sales volume in fiscal year 2012. We also reduced the breadth and frequency of limited time offers in fiscal year 2012 compared to fiscal year 2011 in efforts to improve gross profit margins while offering everyday value menu pricing to our guests.

Store level profit margin improved to 15.4% in fiscal year 2012 compared to 12.7% in fiscal year 2011. The food commodity price inflation that we experienced in the first two quarters of fiscal year 2012 subsided in the third and fourth quarter and the food cost management practices that we implemented were effective at reducing waste and identifying areas for food cost savings. Training of our restaurant management and crew members in restaurant unit economics, with a focus on matching the cost structure to the sales and traffic volume at each restaurant, contributed to year-over-year improvement in store level profit margins. Average customer spend increased at both of our core restaurant brands as we reduced our limited time offers (removing the inherent discounts from these specially priced items), improved the mix of menu items sold, and encouraged the purchase


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of additional "add-on" menu items through suggestive selling initiatives. Customer counts increased at Fuddruckers and decreased at our cafeteria units. The decrease in customer counts at our cafeteria units was primarily a reduction in the quantity of kids meals sold and a reduction in the quantity of limited time offers. Our goal in fiscal year 2013 will continue to be balance the trade-off between customer growth and average customer spend. Our aim is always to increase customer frequency by marketing quality offerings and building long term brand loyalty and increased profitability.

Capital spending increased to $25.8 million in fiscal year 2012 from $11.0 million in fiscal year 2011. This capital investment included the development of one cafeteria and three Fuddruckers (two restaurants opened on the first day of fiscal year 2013), funding our remodeling program, recurring maintenance capital including infrastructure projects, as well as property that we acquired and leased to a franchisee. We remain committed to maintaining the attractiveness of all of our restaurant locations where we anticipate operating over the long term. In fiscal year 2013, we anticipate making capital investments of between $22 million and $27 million, primarily for maintaining and remodeling of existing units, purchase of property, and construction of new restaurant units.

We have been able to use our cash from operations to fund our capital expenditures. Additional cash has been generated with the sale of properties that were closed as part of or before the implementation of our Cash Flow Improvement and Capital Redeployment Plan announced in October 2009. As a result, we have been able to use the proceeds from these property sales and excess cash generated from operations to significantly pay down our debt balance to $13.0 million by the end of fiscal year 2012, representing an approximate 75% reduction in our outstanding debt balance over a two year period.

Fiscal Year 2012 Review

Same-store restaurant sales at our restaurant units increased 2.2% for fiscal year 2012 compared to fiscal year 2011. The Fuddruckers restaurants were not included in our same-store grouping until the third quarter of fiscal year 2012. Had the Fuddruckers restaurants been included in the same-store grouping for all of fiscal year 2012, our same-store sales increase would have been 2.6%. Same store sales increased for each of the four quarters in fiscal year 2012, the first time this has been achieved since fiscal year 2006. Our increase in same store sales was generated by an increase in average customer spend at both of our core restaurant brands and an increase in customer traffic at our Fuddruckers restaurants.

Income from continuing operations improved from $2.6 million, or $0.09 per share, on $348.7 million in total sales in fiscal year 2011 to income from continuing operations of $7.6 million, or $0.27 per share, on $350.1 million in total sales in fiscal year 2012.

Fiscal year 2012 income from continuing operations improved by $5.0 million year-over-year. This profitability improvement was the result of expanding store level profit (defined as restaurant sales less food costs, payroll and related cost, and other operating expenses) and lower interest expense. Store level profit as a percentage of restaurant sales improved 270 basis points in fiscal year 2012 compared to fiscal year 2011:

• Food costs, as a percentage of restaurant sales improved to 27.9% in fiscal year 2012 from 28.9% in fiscal year 2011. The decrease in food costs as a percentage of restaurant sales is due to more effective cost management practices resulting, in part, from the restaurant back office system we implemented in fiscal year 2011, as well as the benefit of investing in enhanced training for our restaurant managers and crews.

• Payroll and related costs, as a percentage of restaurant sales, improved to 33.9% in fiscal year 2012 from 34.8% in fiscal year 2011. Payroll and related costs as a percentage of sales improved as crew labor costs decreased as result of better labor scheduling processes adopted during the year, including the ability to react more quickly to changes in customer traffic.


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• Operating expenses, as percentage of restaurant sales, decreased to 22.8% in fiscal year 2012 compared to 23.7% in fiscal year 2011. The improvement was due to significant reductions in utilities and other reductions in restaurant supplies, services and repairs and maintenance expense, partially offset by increases in marketing and advertising expenses and insurance costs.

• Depreciation expense increased $0.8 million in fiscal year 2012 compared to fiscal year 2011 due to investments made in new locations as well as the capital we have used for remodeling existing locations and reflects primarily the addition of Fuddruckers assets, partially offset by lower depreciation of our cafeteria assets.

• General and administrative expenses increased by $1.1 million reflecting primarily an increase in salaries and benefits.

• Interest expense decreased $1.5 million on lower average outstanding debt balances. The lower debt balances are a result of cash from operations and proceeds from property sales being used to first fund capital investments and then reduce debt balances.

• Income taxes included a valuation allowance release of $2.6 million in fiscal year 2012 income from continuing operations offset by an unrecognized tax benefit accrual of $0.9 million.

Our culinary contract services ("CCS") business continued to grow as this business generated $17.7 million in sales during fiscal year 2012 compared to $15.6 million in sales during fiscal year 2011. We view this area as a growth business that generally requires less capital investment and more favorable percentage returns on invested capital.

Our long-term plan continues to focus on expanding both of our brands, including the Fuddruckers franchise network, as well as growing our CCS business. We are also committed to making capital investments with suitable return characteristics, reducing debt through sales of properties where we have closed restaurants as well as using cash flow from operations. We believe our operational execution has improved through our commitment to higher operating standards, and we believe that we are well-positioned to enhance shareholder value over the long term.

Accounting Periods

Our fiscal year ends on the last Wednesday in August. Accordingly, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. However, every fifth or sixth year, we have a fiscal year that consists of 53 weeks, accounting for 371 days in the aggregate; fiscal year 2011 was such a year. Each of the first three quarters of each fiscal year consists of three four-week periods, while the fourth quarter normally consists of four four-week periods. However, the fourth quarter of fiscal year 2011, as a result of the additional week, consisted of three four week periods and one five-week period, accounting for 17 weeks, or 119 days, in the aggregate. Fiscal years 2010 and 2009 both contained 52 weeks. Comparability between quarters may be affected by the varying lengths of the quarters, as well as the seasonality associated with the restaurant business.

Same-Store Sales

The restaurant business is highly competitive with respect to food quality, concept, location, price, and service, all of which may have an effect on same-store sales. Our same-store sales calculation measures the relative performance of a certain group of restaurants. To qualify for inclusion in this group, a store must have been in operation for 18 consecutive accounting periods. The Fuddruckers units that were acquired in July 2010 were included in the same-store grouping beginning with the third quarter of fiscal yaer 2012. Stores that close on a permanent basis are removed from the group in the fiscal quarter when operations cease at the restaurant, but remain in the same-store group for previously reported fiscal quarters. Although management believes this approach leads to more effective year-over-year comparisons, neither the time frame nor the exact practice may be similar to those used by other restaurant companies. Same-store sales at our restaurant units increased 2.2% for fiscal year 2012, increased 2.5% for fiscal year 2011 and decreased 7.4% for fiscal year 2010.


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The following table shows the same-store sales change for comparative historical quarters:

Fiscal Year 2012 Fiscal Year 2011 Fiscal Year 2010 Increase (Decrease) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Same-store sales 2.4 % 1.1 % 2.2 % 3.5 % (0.6 )% 3.5 % 2.7 % 5.5 % (0.5 )% (4.8 )% (12.5 )% (13.3 )%

Discontinued Operations

Our Cash Flow Improvement and Capital Redeployment Plan called for the closure of 24 underperforming units. In accordance with the plan, the entire fiscal activity of the applicable stores closed after the inception of the plan has been classified as discontinued operations. Results related to these same locations have also been classified as discontinued operations for all periods presented.

RESULTS OF OPERATIONS

Fiscal Year 2012 (52 weeks) compared to Fiscal Year 2011 (53 weeks)

Sales

Total company sales increased approximately $1.3 million, or 8.4%, in fiscal year 2012 compared to fiscal year 2011, consisting primarily of a $2.1 million increase in CCS sales, offset by a $0.8 million decrease in restaurant sales. The other components of total sales are franchise revenue and vending income.

The company operates with three reportable operating segments: Company owned restaurants, franchise operations, and CCS.

Company Owned Restaurants

Restaurant Sales

Restaurant sales decreased $0.8 million in fiscal year 2012 compared to fiscal year 2011. The decrease in restaurant sales included a $3.6 million decrease in sales at Luby's cafeteria-branded restaurants offset by a $2.8 million increase in sales from Fuddruckers-branded restaurants. Part of this decrease was also due to the inclusion of one more week in fiscal year 2011 compared to fiscal year 2012. The extra week in fiscal 2011 accounted for approximately $4.3 million in sales at our cafeteria units and $1.9 million in sales at our company-operated Fuddruckers units in that year.

On a same store-store basis, restaurant sales increased 2.2%. The improved same store sales is primarily due to improving economic conditions, our focus on continued local restaurant marketing efforts, expansion of our catering business, and the remodeling efforts at specific restaurant units.

Cost of Food

Food costs decreased approximately $3.8 million, or 4.0%, in fiscal year 2012 compared to fiscal year 2011 primarily due to more effective cost management practices and benefits from the restaurant back office system we implemented before the start of fiscal year 2012, and the inclusion of one additional week in fiscal year 2011. The additional week in fiscal year 2011 accounted for approximately $1.8 million in food costs. As a percentage of restaurant sales, food costs decreased 1.0%, to 27.9%, in fiscal year 2012 compared to 28.9% in fiscal year 2011. This improvement was due primarily to realizing the
(1) benefits of enhanced training for our restaurant management and crews;
(2) increased utilization of our restaurant back office system; (3) reduction in the quantity and frequency of offering select menu items at a lower price on a limited time basis during certain periods in order generate incremental guest traffic; and (4) partially offset by higher food commodity prices in several categories during the first half of fiscal year 2012 compared to fiscal year 2011.


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Payroll and Related Costs

Payroll and related costs decreased approximately $2.9 million, or 2.6% in fiscal year 2012 compared to fiscal year 2011 due primarily to the inclusion of one additional week in fiscal year 2011 as well as enhanced labor scheduling processes adopted during fiscal year 2012. The additional week accounted for approximately $2.2 million in payroll and related costs. As a percentage of restaurant sales, these costs improved 0.8%, to 33.9%, in fiscal year 2012 compared to 34.8% in fiscal year 2011. The improvement in these costs as a percentage of sales is due to (1) enhanced labor scheduling processes that include the ability to react more quickly to changes in customer traffic,
(2) the reduction in hourly labor required when compared to fiscal year 2011 with its increased customer traffic generated from limited time offers; and
(3) the ability to leverage labor costs on the higher same store sales volume. These decreases in payroll and labor costs were offset by some increases in restaurant management positions at certain units to support the local store marketing initiatives, drive incremental sales, while further improving customer service.

Other Operating Expenses

Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, services and occupancy costs. Other operating expenses improved approximately $2.9 million, or 3.7%, in fiscal year 2012 compared to fiscal year 2011. The decrease was due primarily to decreases in most cost categories and the inclusion of one additional week in fiscal year 2011. The additional week accounted for approximately $1.5 million in other operating expenses. As a percentage of restaurant sales, other operating expenses improved 0.9%, to 22.8%, in fiscal year 2012 compared to 23.7% in fiscal year 2011. This improvement in other operating expenses as a percentage of restaurant sales was due to (1) lower utility costs with more typical weather in our core markets in fiscal year 2012 compared to fiscal year 2011 and lower utility rates; (2) lower repairs and maintenance costs. Restaurant services and supplies was marginally lower as a percent of sales offset by marginally higher marketing and advertising expense as a percentage of sales.

Franchise Operations

We offer franchises for the Fuddruckers brand. Franchises are sold in markets where expansion is deemed advantageous to the development of the Fuddruckers concept and system of restaurants. Franchise revenue includes (1) royalties to paid to us as the franchisor for the Fuddruckers brand; (2) franchise fees paid to us when franchise development agreements are executed and when franchise units are opened for business or transferred to new owners. Franchise revenue increased $140 thousand in fiscal year 2012 compared to fiscal year 2011 which included a $155 thousand increase in franchise fees offset by a $15 thousand decline in franchise royalties. In fiscal year 2012, our franchisees opened six units, including one in Mexico where we are a joint venture partner. During the year, there were also three franchise units that closed on a permanent basis. We ended fiscal year 2012 with 125 Fuddruckers franchise units in the system. As of November 5, 2012, we are the franchisor to 121 franchise owned and operated units.

Culinary Contract Services

CCS is a business line servicing healthcare, higher education, and corporate dining clients. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service and retail dining. This business line varied between 18 and 21 client locations through fiscal year 2012 and also between 18 and 21 client locations in 2011. In fiscal year 2012, we refined our operating model by concentrating on clients able to enter into agreements where all operating costs are reimbursed to us and we charge a generally fixed fee. These agreements typically present lower financial risk to the company.

Culinary Contract Services Revenue

CCS revenue increased $2.1 million, or 13.4% in fiscal year 2012 compared to fiscal year 2011. While the number of locations has varied, we believe we now operate with a stronger mix of client. A number of locations


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realized sales volume increases or were open for a greater portion of fiscal year 2012 than fiscal year 2011. One location that opened in quarter 2 of fiscal year 2012 contributed $0.6 million to the revenue increase while four locations that ceased operations prior to the start of fiscal year 2012 reduced revenue by $0.8 million.

Cost of Culinary Contract Services

Cost of CCS includes the food, payroll and related, and other direct operating expenses associated with generating culinary contract sales. Cost of CCS increased approximately $2.0 million, or 14.0%, in fiscal year 2012 compared to fiscal year 2011 due to a commensurate increase in culinary contract sales volume.

Opening Costs

Opening costs include labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were approximately $0.4 million in fiscal year 2012 compared to approximately $0.3 million in fiscal year 2011. Opening costs in fiscal year 2012 included the cost associated with opening three Fuddruckers units and one cafeteria, as well as the carrying costs for property slated for development. Opening costs in fiscal year 2011 included the costs associated with opening one Luby's Cafeteria unit, three Fuddruckers units, one Fuddruckers Express, the carrying costs for one property slated for future development, and the support costs associated with franchisees opening one unit.

Depreciation and Amortization

Depreciation and amortization expense increased by approximately $0.8 million, or 4.5%, in fiscal year 2012 compared to fiscal year 2011 primarily due to the investments made in new locations as well as the capital we have used to remodeling existing locations.

General and Administrative Expenses

General and administrative expenses include corporate salaries and benefits-related costs, including restaurant area leaders, share-based compensation, professional fees, travel and recruiting expenses and other office expenses. General and administrative expenses increased by approximately $1.1 million, or 3.9%, in fiscal year 2012 compared to fiscal year 2011. The increase was due to an increase of $1.7 million in salaries and benefits expense in fiscal year 2012 as result of higher base and variable incentive compensation, offset by a $0.8 reduction in professional fees and corporate services. Increases in travel expense and insurance expense offset by corporate supplies and other corporate expenses increased by $0.2 million in the aggregate. As a percentage of total sales, general and administrative expenses increased to 8.8% in fiscal year 2012 compared to 8.5% in fiscal year 2011 primarily due to the increase in corporate salary and benefit expense.

Provision for asset impairments, net

The provision for asset impairments, net, increased $0.4 million in fiscal year 2012 compared to fiscal year 2011. The impairment charges in fiscal year 2012 relate to one terminated culinary location, and two leased restaurant properties that we continue to operate. The impairment charges in fiscal year 2011 relate to one closed restaurant property that was sold during the fiscal year and one closed restaurant property at the end of the fiscal year that was under contract to be sold. In each case, the actual or estimated net sales proceeds were less than the net carrying value of the assets.

Net Loss (Gain) on Disposition of Property and Equipment

The disposition of property and equipment in fiscal year 2012 resulted in a net loss of approximately $0.3 million, which included normal asset retirement activity in our restaurant units as well as the loss on disposition of assets at two restaurant locations that closed during fiscal year 2012. The disposition of property and


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equipment in fiscal year 2011 resulted in a net gain of approximately $1.4 million, which included gain on sales of restaurant properties in excess of net book value, partially offset by asset retirement activity in our restaurant units.

Interest Income

Interest income increased by approximately $4 thousand primarily due to marginally higher cash and cash equivalent balances.

Interest Expense

Interest expense in fiscal year 2012 decreased approximately $1.5 million compared to fiscal year 2011, due to lower average outstanding debt balances as excess cash from operations and sales of properties was utilized to reduce debt balances.

Other Income, Net

Other income, net, consisted primarily of the following components: net rental property income and expenses relating to property for which we are the landlord; prepaid sales tax discounts earned through our participation in state tax prepayment programs; and oil and gas royalty income.

Other income, net, decreased by approximately $0.2 million in fiscal year 2012 compared to fiscal year 2011. The decrease was primarily due to (1) oil and gas royalty income earned in fiscal year 2011 that was not earned in fiscal year 2012; offset by (2) higher net rental income on properties that we lease to third parties.

Taxes

The income tax expense related to continuing operations for fiscal year 2012 was $1.7 million compared to income tax expense of $0.5 million for fiscal year 2011. The expense for income taxes in fiscal year 2012 reflects the tax effect of the pre-tax income for the year adjusted for state income taxes, general business credits and a reduction in a tax valuation allowance. The income tax expense in fiscal year 2011 reflects the tax effect of pre-tax income for the year adjusted for state income taxes, general business credits and a reduction in a tax valuation allowance.

The reversals of the valuation allowance amounts in fiscal years 2011 and 2012 were based upon continued improvement in current and projected operational performance, our ability to utilize net operating loss ("NOL") amounts through carryforward and carryback, as well as recent income from continuing operations. This positive and negative evidence was weighed, and in each year an increasing portion of our deferred tax assets were determined to be realizable, on a more likely than not basis, resulting in reductions of the valuation allowance.

Discontinued Operations

The loss or income from discontinued operations was a $0.7 million loss in fiscal year 2012 compared to income of $0.4 million in fiscal year 2011. The loss of $0.7 million in fiscal year 2012 included (1) $0.8 million in "carrying costs" (typically rent, property taxes, utilities, and maintenance) associated . . .

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