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LUB > SEC Filings for LUB > Form 10-Q on 25-Mar-2013All Recent SEC Filings

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Form 10-Q for LUBYS INC


25-Mar-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and footnotes for the period ended February 13, 2013 included in Item 1 of Part I of this Quarterly Report on Form 10-Q, and the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended August 29, 2012.

The following presents an analysis of the results and financial condition of our continuing operations. Except where indicated otherwise, the results of discontinued operations are excluded from this discussion.

Overview

Luby's, Inc. is a multi-branded company operating in the restaurant industry and the contract food services industry. Our primary brands include Luby's Cafeteria, Luby's Culinary Contract Services, Fuddruckers, and Cheeseburger in Paradise. Also included in our brands are Luby's, Etc. and Koo Koo Roo Chicken Bistro. We purchased substantially all of the assets of Fuddruckers, Inc., Magic Brands, LLC and certain of their affiliates (collectively, "Fuddruckers") in July 2010. We purchased all of the Membership Units of Paradise Restaurant Group, LLC and certain of their affiliates (collectively known as, "Cheeseburger in Paradise") effective December 5, 2012.

As of February 13, 2013, we owned and operated 183 restaurants, of which 93 are traditional cafeterias, 64 are gourmet hamburger restaurants, 23 are casual dining bar and restaurants, two are upscale fast serve chicken restaurants, and one primarily serves seafood. These establishments are located in close proximity to retail centers, business developments and residential areas mostly throughout the United States.

Also as of February 13, 2013, we operated 18 Culinary Contract Service facilities. These facilities are located within healthcare and education settings in Texas and Louisiana. These facilities provide food service options to varied populations including in-hospital-room patient meal service, retail food-court style restaurant dining, and coffee/snack kiosks.

Also as of February 13, 2013, we are a franchisor for a network of 119 franchised Fuddruckers restaurants. The owners of these franchise units pay royalty revenue to us as a franchisor.

Accounting Periods

Our fiscal year ends on the last Wednesday in August. As such, each fiscal year normally consists of 13 four-week periods, or accounting periods, accounting for 364 days in the aggregate. 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. Comparability between quarters may be affected by 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. Our Fuddruckers units were included in this measurement beginning with the third fiscal quarter ended May 9, 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.

RESULTS OF OPERATIONS

For the Second Quarter and Year-to-Date Fiscal Year 2013 versus the Second Quarter and Year-to-Date Fiscal Year 2012

Sales

Total company sales increased approximately $8.1 million, or 10.2%, in the quarter ended February 13, 2013 compared to quarter ended February 15, 2012, consisting primarily of a $8.7 million increase in restaurant sales, offset by a $0.5 million decrease in Culinary Contract Sales and a $0.1 million decrease in franchise revenue. The other component of total sales is vending income.

Total company sales increased approximately $8.2 million, or 5.2%, in the two quarters ended February 13, 2013 compared to the two quarters ended February 15, 2012, consisting primarily of a $9.5 million increase in restaurant sales, offset by a $1.2 million decrease in Culinary Contract Sales and a $0.1 million decrease in franchise revenue. The other component of total sales is vending income.

The company operates with three reportable operating segments: Company-owned restaurants, franchise operations, and Culinary Contract Services.


Company-Owned Restaurants

Restaurant Sales

Restaurant sales increased $8.7 million in the quarter ended February 13, 2013, compared to the quarter ended February 15, 2012. The increase in restaurant sales included a $7.7 million increase due to the acquisition of 23 Cheeseburger in Paradise branded stores, a $1.0 million increase in sales from Fuddruckers-branded restaurants and a less than $0.1 million increase in sales at Luby's Cafeteria-branded restaurants. On a same store-store basis, restaurant sales decreased 0.6%. The decrease in same store sales was due primarily by declines in guest traffic partially offset by increases in the per person average spend. The increase in per person average spend was a result of altering the mix of menu items offered and selected by our customers and by motivating the purchase of additional items on the customer ticket.

Restaurant sales increased $9.5 million in the two quarters ended February 13, 2013, compared to the quarter ended February 15, 2012. The increase in restaurant sales included a $7.7 million increase due to the acquisition of 23 Cheeseburger in Paradise branded stores, a $0.4 million increase in sales at Luby's Cafeteria-branded restaurants and a $1.4 million increase in sales from Fuddruckers-branded restaurants. On a same store-store basis, restaurant sales decreased 0.2%. The decrease in same store sales was due primarily by declines in guest traffic partially offset by increases in the per person average spend. The increase in per person average spend was a result of altering the mix of menu items offered and selected by our customers and by motivating the purchase of additional items on the customer ticket.

Cost of Food

Food costs increased approximately $3.0 million, or 14.5%, in the quarter ended February 13, 2013, compared to the quarter ended February 15, 2012 due primarily to the addition of 23 Cheeseburger in Paradise branded stores. Removing the impact of Cheeseburger in Paradise and food and beverage rebates, food costs increased $0.7 million for the quarter ended February 13, 2013, compared to the quarter ended February 15, 2012. Food commodity prices for our basket of food commodity purchases were higher by 2.1% for our Luby's Cafeteria-branded restaurants offset by a decrease in the Fuddruckers-branded restaurants of 1.6%. As a percentage of restaurant sales, food cost increased 0.6% to 28.9% in the quarter ended February 13, 2013, compared to the quarter ended February 15, 2012. Removing the impact of Cheeseburger in Paradise, food costs as a percent of sales were 28.8%.

Food costs increased approximately $3.3 million, or 8.1%, in the two quarters ended February 13, 2013, compared to the two quarters ended February 15, 2012, due primarily to the addition of 23 Cheeseburger in Paradise branded stores. Removing the impact of Cheeseburger in Paradise and food and beverage rebates, food costs were $0.7 million higher for the two quarters ended February 13, 2013, compared to the two quarters ended February 15, 2012. For the two quarters ended February 13, 2013, food commodity prices for our basket of food commodity purchases were higher due to a 2.1% increase for our Luby's Cafeteria-branded restaurants offset by a 1.5% decrease for our Fuddruckers-branded restaurants. As a percentage of restaurant sales, food cost increased, 0.4% to 28.6% in the two quarters ended February 13, 2013. Removing the impact of Cheeseburger in Paradise, food costs as a percentage of sales were 28.5% in the two quarters ended February 13, 2013.

Payroll and Related Costs

Payroll and related costs increased approximately $3.4 million in the quarter ended February 13, 2013 compared to the quarter ended February 15, 2012. Hourly labor costs increased primarily due to the addition of 23 new Cheeseburger in Paradise branded stores. Restaurant management labor costs increased $0.9 million in the quarter ended February 13, 2013 compared to the quarter ended February 15, 2012, primarily due to the addition of the 23 Cheeseburger in Paradise branded stores. As a percentage of restaurant sales, payroll and related costs increased, 0.5%, to 35.1% in the quarter ended February 13, 2013, compared to 34.6% in the quarter ended February 15, 2012, primarily due to the acquisition of Cheeseburger in Paradise branded stores. Excluding Cheeseburger in Paradise, payroll and related costs were 34.6% in the quarter ended February 13, 2013.

Payroll and related costs increased approximately $3.9 million in the two quarters ended February 13, 2013, compared to the two quarters ended February 15, 2012. Hourly labor costs increased primarily due to the addition of 23 new Cheeseburger in Paradise branded stores. Restaurant management labor costs increased $0.9 million in the two quarters ended February 13, 2013 compared to the two quarters ended February 15, 2012, primarily due to the addition of the Cheeseburger in Paradise branded stores. As a percentage of restaurant sales, payroll and related costs increased, 0.4%, to 34.8% in the two quarters ended February 13, 2013, compared to 34.4% in the two quarters ended February 15, 2012, primarily due to the acquisition of Cheeseburger in Paradise branded stores. Excluding the impact of Cheeseburger in Paradise, payroll and related costs increased 0.1% in the two quarters ended February 13, 2013.

Other Operating Expenses

Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, services, supplies and occupancy costs. Other operating expenses increased by approximately $3.4 million, or 21.4%, in the quarter ended February 13, 2013 compared to the quarter ended February 15, 2012, primarily due to (1) $2.4 million increase from the addition of 23 Cheeseburger in Paradise branded stores; (2) an approximate $0.3 million increase in utilities; (3) an approximate $0.4 million increase in restaurant supply and services expense; and (3) an approximate $0.5 million increase in occupancy and insurance, and other costs partially offset by (4) an approximate $0.2 million reduction in repairs and maintenance expenses. As a percentage of restaurant sales, other operating expenses increased 1.8%, to 23.8%, in the quarter ended February 13, 2013 compared to 22.0% in the quarter ended February 15, 2012, due to (1) the cost increases, partially offset by the costs decreases, enumerated above; (2) the typically higher operating costs for the four to eight weeks after opening a new restaurant; and (3) a decline in sales in our same store group of restaurants. Excluding the impact of Cheeseburger in Paradise, other operating expenses costs as a percentage of sales were 23.1%, in the quarter ended February 13, 2013.


Other operating expenses increased by approximately $3.8 million, or 11.2%, in the two quarters ended February 13, 2013 compared to the two quarters ended February 15, 2012, primarily due to (1) $2.4 million increase from the addition of 23 Cheeseburger in Paradise branded stores; (2) an approximate $0.4 million increase in utilities; (3) an approximate $0.8 million increase in restaurant supply and services expense; (4) an approximate $0.3 million increase in marketing expenses; and (5) an approximate $0.2 million increase in insurance and other expenses partially offset by (6) an approximate $0.3 million reduction in repairs and maintenance expenses.

Franchise Operations

We only 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 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 decreased $113 thousand in the quarter ended February 13, 2013 compared to the quarter ended February 15, 2012. The $113 thousand decrease in franchise revenue includes an $18 thousand decrease in franchise royalties and a $95 thousand decrease in franchise fees.

Franchise revenue decreased $74 thousand for the two quarters ended February 13, 2013 compared to the two quarters ended February 15, 2012 due to a reduction in franchise fees. At the quarter ended February 15, 2012, there were 122 Fuddruckers franchise units in the system. Over the prior one year period ended February 13, 2013, our franchisees have opened 4 units, including one in Mexico where we are a joint venture partner. Over the prior one year period ended February 13, 2013 there were also five franchise units that closed on a permanent basis and two units that transferred to us as the franchisor to operate as company-operated units. As such, at the quarter ended February 13, 2013, there were 119 Fuddruckers franchise units in the system.

Culinary Contract Services

Culinary Contract Services 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 operated 18 client locations in the quarter ended February 13, 2013 and 19 in the quarter ended February 15, 2012. 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 generally charge a fixed fee. These agreements typically present lower financial risk to the company.

Culinary Contract Services Revenue

Culinary Contract Services revenue decreased $0.5 million, or 12.6% in the quarter ended February 13, 2013 compared to the quarter ended February 15, 2012. The decrease in revenue was primarily due to the reduction in the number of locations where we operate and the sales volume at those locations.

Culinary Contract Services revenue decreased $1.2 million, or 14.0% in the two quarters ended February 13, 2013 compared to the two quarters ended February 15, 2012. The decrease in revenue was primarily due to the reduction in the number of locations where we operate and the sales volume at those locations.

Cost of Culinary Contract Services

Cost of Culinary Contract Services includes the food, payroll and related costs, and other direct operating expenses associated with generating culinary contract sales. Cost of Culinary Contract Services decreased approximately $0.8 million, or 19.2%, in the quarter ended February 13, 2013 compared to the quarter ended February 15, 2012, due to a commensurate decrease in culinary contract sales volume. We expanded our profit margin in this business segment to 8.9% of culinary contract services revenue in the quarter ended February 13, 2013 from 1.4% on the quarter ended February 15, 2012.

Cost of Culinary Contract Services decreased approximately $1.4 million, or 17.4%, in the two quarters ended February 13, 2013 compared to the two quarters ended February 15, 2012, due to a commensurate decrease in culinary contract sales volume. We expanded our profit margin in this business segment to 9.3% of culinary contract services revenue in the quarter ended February 13, 2013 from 5.6% on the quarter ended February 15, 2012.

Opening Costs

Opening costs include labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were approximately $261 thousand in the quarter ended February 13, 2013 compared to approximately $42 thousand in the quarter ended February 15, 2012. The quarter ended February 13, 2013 and the quarter ended February 15, 2012 included carrying costs of locations to be developed for future restaurant openings. The quarter ended February 13, 2013 also included the labor, supplies, and other costs necessary to support the opening of two Fuddruckers restaurants, one of which was previously operated by a franchise owner.


Opening costs were approximately $467 thousand in the two quarters ended February 13, 2013, compared to approximately $77 thousand in the two quarters ended February 15, 2012. The two quarters ended February 13, 2013 and the two quarters ended February 15, 2012, included carrying costs of locations to be developed for future restaurant openings. The two quarters ended February 13, 2013, also included the labor, supplies, and other costs necessary to support the opening of one cafeteria and five Fuddruckers restaurants. Three of these restaurants were previously operated by franchise owners.

Depreciation and Amortization

Depreciation and amortization expense increased by approximately $0.2 million, or 4.3%, in the quarter ended February 13, 2013, compared to the quarter ended February 15, 2012, due to the addition of depreciation related to Cheeseburger in Paradise, and new capital expenditures for new construction and remodel activity partially offset by certain assets reaching the end of their depreciable lives.

Depreciation and amortization expense increased by approximately $0.2 million, or 2.2% in the two quarters ended February 13, 2013, compared to the two quarters ended February 15, 2012, due to the addition of depreciation related to Cheeseburger in Paradise, and new capital expenditures for new construction and remodel activity partially offset by certain assets reaching the end of their depreciable lives.

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 $0.9 million, or 13.0%, in the quarter ended February 13, 2013 compared to the quarter ended February 15, 2012. The increase was primarily due to the integration costs of $0.4 million and incremental personnel costs of approximately $0.2 million related to the acquisition of Cheeseburger in Paradise. The remaining increase was related to professional fees, corporate supply costs, and other expenses. As a percentage of total revenue, general and administrative expenses increased to 8.7% in the quarter ended February 13, 2013, compared to 8.5% in the quarter ended February 15, 2012.

General and administrative expenses increased by approximately $1.4 million, or 10.7%, in the two quarters ended February 13, 2013, compared to the two quarters ended February 15, 2012. The increase was primarily due to (1) integration costs of $0.4 million and incremental personnel costs of approximately $0.2 million related to the acquisition of Cheeseburger in Paradise; (2) professional fees, corporate supply costs, and other expenses; and (3) a non-recurring receipt of $0.3 million settlement in our favor from a class action suit related to credit card interchange fees that was recorded in the quarter ended November 23, 2011. As a percentage of total revenue, general and administrative expenses increased to 9.0% in the two quarters ended February 13, 2013, compared to 8.5% in the two quarters ended February 15, 2012.

Provision for asset impairments, net

The asset impairment of $90 thousand in the two quarters ended February 13, 2013, reflects the impairment of one leased location where the projected future cash flows through the end of the lease term are now not expected to support the value of the assets at the location.

An impairment charge of $175 thousand for the two quarters ended February 15, 2012, was related to one Culinary Contract Services location.

Net (Gain) Loss on Disposition of Property and Equipment

The loss or gain on disposition of property and equipment was a gain of approximately $1.3 million in the quarter ended February 13, 2013, and related to the disposition of a portion of our parking lot at one restaurant location offset by normal asset retirement activity in our restaurant units. The loss or gain on disposition of property and equipment was a loss of $72 thousand in the quarter ended February 15, 2012, and related primarily to normal asset retirement activity.

The net gain on dispositions of property and equipment for the two quarters ended February 13, 2013 of approximately $1.6 million primarily related to the disposition of property at one restaurant location and the sale of a portion of our leasehold interest in another restaurant offset by normal asset retirement activity. The loss of $81 thousand in the two quarters ended February 13, 2013 related primarily to normal asset retirement activity.

Interest Income

Interest income was $2 thousand in the quarter ended February 13, 2013, and in the quarter ended February 15, 2012.

Interest income was $4 thousand in the two quarters ended February 13, 2013, compared to $3 thousand in the two quarters ended February 15, 2012.


Interest Expense

Interest expense in the quarter ended February 13, 2013 was $0.2 million and $0.4 million in the quarter ended February 15, 2012 due to similar debt balances and interest rates.

Interest expense in the two quarters ended February 13, 2013 decreased approximately $0.1 million compared to the two quarters ended February 15, 2012, due to lower average 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 in the quarter ended February 13, 2013 increased approximately $17 thousand compared to the quarter ended February 15, 2012. The increase was primarily due to higher net rental income on properties that we lease to third parties.

Other income, net in the two quarters ended February 13, 2013 increased approximately $44 thousand compared to the quarter ended February 15, 2012. The increase was primarily due to higher net rental income on properties that we lease to third parties.

Taxes

For the quarter ended February 13, 2013, the income taxes related to continuing operations resulted in a tax provision of $487 thousand compared to a tax provision of $603 thousand for the quarter ended February 15, 2012.

For the two quarters ended February 13, 2013, the income taxes related to continuing operations resulted in a tax provision of $566 thousand compared to a tax provision of $928 thousand for the two quarters ended February 15, 2012. For the two quarters ended February 13, 2013 and the two quarters ended February 15, 2012, there was no change to the valuation allowance related to deferred tax assets.

Discontinued Operations

The loss from discontinued operations was $0.4 million in the quarter ended February 13, 2013 compared to a loss of $0.3 million in the quarter ended February 15, 2012. The loss from discontinued operations of $0.4 million in the quarter ended February 13, 2013 included (1) $0.1 million in carrying costs associated with assets related to discontinued operations, (2) an asset impairment of $0.5 million and (3) an income tax benefit of $0.2 million. The loss of $0.3 million from discontinued operations in the quarter ended February 15, 2012 included $0.2 million in carrying costs associated with assets related to discontinued operations and an asset impairment of $0.1 million.

The loss from discontinued operations was $0.5 million in the two quarters ended February 13, 2013 compared to a loss of $0.6 million in the two quarters ended February 15, 2012. The loss of $0.5 million for the two quarters ended February 13, 2013 included (1) $0.3 million loss in carrying costs associated with assets that are classified as discontinued operations assets; (2) a $0.5 million impairment charge for assets that are classified as discontinued operations assets; (3) offset by $0.3 million income tax benefit. The loss of $0.6 million in the two quarters ended February 15, 2012 included (1) $0.4 million in carrying costs associated with assets that are classified as discontinued operations assets; (2) a $0.5 million impairment charge for assets that are classified as discontinued operations assets; and (3) $0.3 million income tax benefit related to discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents

General. Our primary sources of short-term and long-term liquidity are cash flows from operations and our revolving credit facility. During the two quarters ended February 13, 2013, cash provided by operating activities was $7.6 million and by financing activities was $12.7 million offset by cash used in investing activities of $18.6 million. Cash and cash equivalents increased $1.7 million in the first two quarters of fiscal year 2013 compared to no increase or decrease in the first two quarters of fiscal year 2012. Cash provided by operating activities was $10.1 million offset by cash used in investing activities of $8.1 million and financing activities of $2.0 million in the first two quarters of fiscal year 2012. We plan to continue the level of capital and repair and maintenance expenditures necessary to keep our restaurants attractive and operating efficiently.

Our cash requirements consist principally of:

payments to purchase Cheeseburger in Paradise;

capital expenditures for construction, restaurant renovations, purchase of property for development of our restaurant brands and for use as rental property and upgrades and information technology; and

working capital primarily for our Company-owned restaurants and CCS agreements.


As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories and our vendors grant trade credit for purchases such as food and supplies. However, higher levels of accounts receivable are typical for culinary contract services and franchises. We also continually invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets.

The following table summarizes our cash flows from operating, investing and financing activities:

                                                           Two Quarters ended
                                                     February 13,       February 15,
                                                         2013               2012
                                                      (24 weeks)         (24 weeks)
                                                             (In thousands)
 Total cash provided by (used in):
 Operating activities                               $        7,567     $       10,125
 Investing activities                                      (18,550 )           (8,128 )
 Financing activities                                       12,657             (2,001 )
 Increase (decrease) in cash and cash equivalents   $        1,674     $           (4 )
. . .
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