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LUB > SEC Filings for LUB > Form 10-Q on 17-Jun-2013All Recent SEC Filings

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Form 10-Q for LUBYS INC


17-Jun-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 May 8, 2013 included in Item1 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, Fuddruckers, Cheeseburger in Paradise and Luby's Culinary Contract Services. Also included in our brands are Luby's, Etc. and Koo Koo Roo Chicken Bistro ("Koo Koo Roo"). We purchased substantially all of the assets of Fuddruckers, Inc., Magic Brands, LLC and certain of their affiliates (collectively known as, "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 May 8, 2013, we owned and operated 182 restaurants, of which 93 are traditional cafeterias, 63 are gourmet hamburger restaurants, 23 are casual dining restaurants and bar, 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 May 8, 2013, we operated 19 Culinary Contract Service facilities. These facilities service healthcare, higher education and corporate dining clients in Texas and Louisiana. The healthcare accounts are full service and typically include in-room delivery, catering, vending, coffee service and retail dining. Culinary Contract Services has contracts with long-term acute care hospitals, business and industry clients and higher education institutions.

Also as of May 8, 2013, we are a franchisor for a network of 117 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 Third Quarter and Year-to-Date Fiscal Year 2013 versus the Third Quarter and Year-to-Date Fiscal Year 2012

Sales

Total sales increased approximately $13.3 million, or 15.9%, in the quarter ended May 8, 2013 compared to the quarter ended May 9, 2012, consisting primarily of a $13.7 million increase in restaurant sales, offset by a $0.2 million decrease in Culinary Contract Sales and a $0.1 million decrease in franchise revenue. The other component of total sales is vending revenue.


Total sales increased approximately $21.5 million, or 8.9%, in the three quarters ended May 8, 2013 compared to the three quarters ended May 9, 2012, consisting primarily of a $23.2 million increase in restaurant sales, offset by a $1.5 million decrease in Culinary Contract Sales and a $0.1 million decrease in franchise revenue. The other component of total sales is vending revenue.

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 $13.7 million in the quarter ended May 8, 2013, compared to the quarter ended May 9, 2012. The increase in restaurant sales included an $11.4 million increase due to the acquisition of 23 Cheeseburger in Paradise-branded stores, a $1.4 million increase in sales from Fuddruckers and Koo Koo Roo-branded restaurants and a $0.8 million increase in sales at Luby's Cafeteria-branded restaurants. In addition, nine new stores added over the last 18 accounting periods and thus not yet in our same store groupings, added another $3.1 million. Three units that have closed since last year deducted $0.8 million from restaurant sales and the modest decline in same store sales deducted another $0.1 million. On a same-store basis, restaurant sales decreased 0.1%. At our Luby's Cafeteria restaurants, declines in guest traffic of 1.1% were partially offset by increases in the per person average spend. At our Fuddruckers restaurants, increases in the per person average spend were offset by decline in guest traffic of 2.1%. 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 $23.2 million in the three quarters ended May 8, 2013, compared to the three quarters ended May 9, 2012. The increase in restaurant sales included a $19.2 million increase due to the acquisition of 23 Cheeseburger in Paradise-branded stores, $1.2 million increase in sales at Luby's Cafeteria-branded restaurants and a $2.8 million increase in sales from Fuddruckers and Koo Koo Roo-branded restaurants. On a same-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 $4.8 million, or 22.7%, in the quarter ended May 8, 2013, compared to the quarter ended May 9, 2012 due primarily to the addition of 23 Cheeseburger in Paradise-branded stores. Food commodity prices for our basket of food commodity purchases were higher by approximately 6% for our Luby's Cafeteria-branded restaurants offset by a decrease in food commodity prices for our basket of food commodity purchases at our Fuddruckers-branded restaurants of approximately 1%. The higher food commodity costs at the Luby's cafeteria-branded restaurants were impacted by increases ranging from 6% to 9% in seafood, cheese, eggs, and fresh produce. Poultry commodity costs increased over 10%. As a percentage of restaurant sales, food cost increased 1.2 % to 28.6% in the quarter ended May 8, 2013, compared to the quarter ended May 9, 2012. Removing the impact of Cheeseburger in Paradise, food costs as a percent of sales were 28.2% for the quarter ended May 8, 2013.

Food costs increased approximately $8.2 million, or 13.1%, in the three quarters ended May 8, 2013, compared to the three quarters ended May 9, 2012, due primarily to the addition of 23 Cheeseburger in Paradise-branded stores.For the three quarters ended May 8, 2013, food commodity prices for our basket of food commodity purchases were higher due to a 3% increase for our Luby's Cafeteria-branded restaurants partially offset by a 1% decrease for our Fuddruckers-branded restaurants. As a percentage of restaurant sales, food cost increased, 0.7% to 28.6% in the three quarters ended May 8, 2013. Removing the impact of Cheeseburger in Paradise, food costs as a percentage of sales were 28.4% in the three quarters ended May 8, 2013.

Payroll and Related Costs

Payroll and related costs increased approximately $4.6 million in the quarter ended May 8, 2013 compared to the quarter ended May 9, 2012. Hourly labor costs increased $3.3 million primarily due to the addition of new restaurants including 23 Cheeseburger in Paradise-branded stores, 8 Fuddruckers restaurants, and one Luby's Cafeteria. Restaurant management labor costs increased $1.2 million in the quarter ended May 8, 2013 compared to the quarter ended May 9, 2012, primarily due to the addition of new restaurants including 23 Cheeseburger in Paradise-branded stores, 8 Fuddruckers restaurants, and one Luby's Cafeteria. As a percentage of restaurant sales, payroll and related costs increased, 0.1%, to 33.1% in the quarter ended May 8, 2013, compared to 33.0% in the quarter ended May 9, 2012, primarily due to the acquisition of Cheeseburger in Paradise-branded stores and the typically higher initial labor costs associated with new restaurant openings offset by improvements in labor costs at existing restaurants. Excluding Cheeseburger in Paradise, payroll and related costs were 32.6% in the quarter ended May 8, 2013.


Payroll and related costs increased approximately $8.4 million in the three quarters ended May 8, 2013, compared to the three quarters ended May 9, 2012. Hourly labor costs increased $6.3 million primarily due to the addition of new restaurants including 23 Cheeseburger in Paradise-branded stores, 8 Fuddruckers restaurants, and one cafeteria. Restaurant management labor costs increased $2.2 million in the three quarters ended May 8, 2013 compared to the three quarters ended May 9, 2012, primarily due to the addition of new restaurants including 23 Cheeseburger in Paradise-branded stores, 8 Fuddruckers restaurants, and one cafeteria. As a percentage of restaurant sales, payroll and related costs increased, 0.3%, to 34.2% in the three quarters ended May 8, 2013, compared to 33.9% in the three quarters ended May 9, 2012, primarily due to the acquisition of Cheeseburger in Paradise-branded stores and the typically higher initial labor costs associated with new restaurant openings offset by improvements in labor costs at existing restaurants. Excluding the impact of Cheeseburger in Paradise, payroll and related costs were 33.9% in the three quarters ended May 8, 2013 and in the three quarters ended May 9, 2012

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 $4.2 million, or 23.9%, in the quarter ended May 8, 2013 compared to the quarter ended May 9, 2012, primarily due to a $3.4 million increase from the addition of 23 Cheeseburger in Paradise-branded stores. Other operating expenses at our Luby's Cafeteria and Fuddruckers brand restaurants increased $0.8 million due to
(1) an approximate $0.2 million increase in utilities; (2) an approximate $0.3 million increase in restaurant supply and services expense; (3) a $0.2 million increase in repairs and maintenance, including the impact of repair costs to restore one Fuddruckers unit that suffered a casualty loss in the quarter; (4) a $0.3 million increase in marketing and advertising due to increased billboard advertising, direct mail programs, and enhance point-of-purchase advertising; offset by (5) a $0.2 million reduction in insurance and occupancy costs, benefitting in part from a decrease in our estimated general liability cost. Utilities and restaurant supplies and services increased in part due to the addition of eight Fuddruckers and one cafeteria that opened over the prior one year ended May 8, 2013. As a percentage of restaurant sales, other operating expenses increased 1.2%, to 23.5%, in the quarter ended May 8, 2013 compared to 22.3% in the quarter ended May 9, 2012, due to (1) the cost increases, partially offset by the costs decreases, enumerated above; and (2) the typically higher initial operating costs associated with new restaurant openings. Excluding the impact of Cheeseburger in Paradise, other operating expenses costs as a percentage of sales were 22.6%, in the quarter ended May 8, 2013.

Other operating expenses increased by approximately $7.9 million, or 15.5%, in the three quarters ended May 8, 2013 compared to the three quarters ended May 9, 2012, primarily due to a $5.8 million increase from the addition of 23 Cheeseburger in Paradise-branded stores. Other operating expenses at our Luby's Cafeteria and Fuddruckers branded restaurants increased $2.1 million including;
(1) an approximate $0.6 million increase in utilities; (2) an approximate $0.7 million increase in restaurant services, including higher credit card interchange fees, higher beverage dispensing costs, and higher software licensing costs (3) an approximate $0.4 million increase in restaurant supplies;
(4) an approximate $0.6 million increase in marketing expenses; partially offset by (5) an approximate $0.2 million reduction in repairs and maintenance expenses. As a percentage of restaurant sales, other operating expenses increased 1.1%, to 23.8%, in the three quarters ended May 8, 2013 compared to 22.7% in the three quarter ended May 9, 2012, due to (1) the cost increases, partially offset by the reduction in repairs and maintenance expense listed above; and (2) the typically higher initial operating costs associated with new restaurant openings. Excluding the impact of Cheeseburger in Paradise, other operating expenses costs as a percentage of sales were 23.3% in the quarter ended May 8, 2013

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 units are opened for business or transferred to new owners. Franchise revenue decreased $63 thousand in the quarter ended May 8, 2013 compared to the quarter ended May 9, 2012. The $63 thousand decrease in franchise revenue includes a $13 thousand decrease in franchise royalties and a $50 thousand decrease in non-royalty related fee income.

Franchise revenue decreased $136 thousand for the three quarters ended May 8, 2013 compared to the three quarters ended May 9, 2012. The $136 thousand decrease in franchise revenue includes a $11 thousand decrease in franchise royalties and a $125 thousand decrease in non-royalty related fee income. At the quarter ended May 9, 2012, there were 124 Fuddruckers franchise units in the system. Over the prior one year period ended May 8, 2013, our franchisees have opened 2 units and there were seven 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 May 8, 2013, there were 117 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 19 client locations at the quarter ended May 8, 2013 and 18 at the quarter ended May 9, 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 $0.2 million, or 5.5% in the quarter ended May 8, 2013 compared to the quarter ended May 9, 2012. The decrease in revenue was primarily due to ceasing operations at one high volume location and a change in the mix of locations where we operate.

Culinary Contract Services revenue decreased $1.5 million, or 11.2% in the three quarters ended May 8, 2013 compared to the three quarters ended May 9, 2012.The decrease in revenue was primarily due to operations ceasing at one high volume location and a change in the mix of locations where we operate.

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 $0.4 million, or 10.2%, in the quarter ended May 8, 2013 compared to the quarter ended May 9, 2012, due to a decrease in culinary contract sales volume and a shift toward a greater portion of contracts where we operate for a generally fixed fee. We expanded our profit margin in this business segment to 12.8% of culinary contract services revenue in the quarter ended May 8, 2013 from 8.2% on the quarter ended May 9, 2012.

Cost of Culinary Contract Services decreased approximately $1.8 million, or 15.1%, in the three quarters ended May 8, 2013 compared to the three quarters ended May 9, 2012, due to a commensurate decrease in culinary contract sales volume and a shift toward a greater portion of contracts where we operate for a generally fixed fee. We expanded our profit margin in this business segment to 10.6% of culinary contract services revenue in the three quarters ended May 8, 2013 from 6.5% on the three quarters ended May 9, 2012. Profit margin in our culinary contract services business expanded in dollar terms and as a percent of culinary contract sales as we have executed on our refined operating model of concentrating on clients able to enter into agreements where all operating costs are reimbursed to us and we generally charge a fixed fee.

Company-wide Expenses

Opening Costs

Opening costs include labor, supplies, occupancy, and other costs necessary to support the restaurant through its opening period. Opening costs were approximately $39 thousand in the quarter ended May 8, 2013 compared to approximately $33 thousand in the quarter ended May 9, 2012. The quarter ended May 8, 2013 and the quarter ended May 9, 2012 included carrying costs of locations to be developed for future restaurant openings. The opening cost in the quarter ended May 8, 2013 also included the residual opening costs for one restaurant opened prior to the quarter ended May 8, 2013.

Opening costs were approximately $0.5 million in the three quarters ended May 8, 2013, compared to approximately $0.1 million in the three quarters ended May 9, 2012.The three quarters ended May 8, 2013 and the three quarters ended May 9, 2012, included carrying costs of locations to be developed for future restaurant openings. The three quarters ended May 8, 2013, also included the labor, supplies, and other costs necessary to support the opening of one Luby's Cafeteria and five Fuddruckers restaurants. Three of these restaurants were previously operated by franchise owners.

Depreciation and Amortization

Depreciation and amortization expense decreased by approximately $0.1 million, or 2.2%, in the quarter ended May 8, 2013, compared to the quarter ended May 9, 2012, due to certain assets reaching the end of their depreciable lives, offset by the addition of depreciation related to Cheeseburger in Paradise assets, and new capital expenditures for new construction and remodel activity.

Depreciation and amortization expense increased by approximately $0.1 million, or 1.0% in the three quarters ended May 8, 2013, compared to the three quarters ended May 9, 2012, due to the addition of depreciation related to Cheeseburger in Paradise assets and new capital expenditures for new construction and remodel activity 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 were $7.2 million in the quarter ended May 8, 2013 and in the quarter ended May 9, 2012. Lower salary, benefits, and incentive expenses were offset by incremental salary and benefits expense related to the operation of Cheeseburger in Paradise. As a percentage of total revenue, general and administrative expenses decreased to 7.4% in the quarter ended May 8, 2013, compared to 8.6% in the quarter ended May 9, 2012.

General and administrative expenses increased by approximately $1.5 million, or 7.2%, in the three quarters ended May 8, 2013, compared to the three quarters ended May 9, 2012. The increase was primarily due to (1) integration costs of $0.4 million related to the acquisition of Cheeseburger in Paradise; (2) an increase of $0.4 million in professional fees, corporate travel expense, and supplies, (3) a $0.4 million increase in salary benefits and incentives expenses, and (4) 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 decreased to 8.4% in the three quarters ended May 8, 2013, compared to 8.5% in the three quarters ended May 9, 2012.

Provision for asset impairments, net

The asset impairment of $113 thousand in the quarter ended May 8, 2013, is related to one operating Fuddruckers restaurant at a leased location.

The asset impairment of $203 thousand in the three quarters ended May 8, 2013, is related to one operating Fuddruckers restaurant at a leased location and an operating Koo Koo Roo restaurant at a leased location.

An impairment charge of $175 thousand for the three quarters ended May 9, 2012, was related to one Culinary Contract Services location.

Net Loss (Gain) on Disposition of Property and Equipment

The loss or gain on disposition of property and equipment was a loss of approximately $0.1 million in the quarter ended May 8, 2013, and related to the retirement of assets at one location that reached the end of its lease and the normal asset retirement activity in our restaurant units. The loss or gain on disposition of property and equipment was a loss of approximately $0.1 million in the quarter ended May 9, 2012, and related to the retirement of assets at one location that reached the end of its lease and the normal asset retirement activity in our restaurant units

The net gain on dispositions of property and equipment for the three quarters ended May 8, 2013 of approximately $1.4 million related primarily to proceeds from the eminent domain disposition part of a parking lot at a Luby's Cafeteria location and the gain on disposal at a Koo Koo Roo leased location, offset by normal asset retirement activity.The loss of approximately $0.2 million in the three quarters ended May 8, 2013 related primarily to normal asset retirement activity.

Interest Income

Interest income was $2 thousand in the quarter ended May 8, 2013, compared to $3 thousand in the quarter ended May 9, 2012.

Interest income was $6 thousand in the three quarters ended May 8, 2013 and $6 thousand in the three quarters ended May 9, 2012.

Interest Expense

Interest expense in the quarter ended May 8, 2013 was $0.2 million in the quarter and $0.2 million in the quarter ended May 9, 2012 due to similar debt balances and interest rates.

Interest expense in the three quarters ended May 8, 2013 decreased approximately $0.1 million compared to the three quarters ended May 9, 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 May 8, 2013 decreased approximately $22 thousand compared to the quarter ended May 9, 2012 related to lower net rental property income.


Other income, net in the three quarters ended May 8, 2013 increased approximately $121 thousand compared to the quarter ended May 9, 2012. The increase was primarily due to higher net rental income on properties that we lease to third parties.

Taxes

For the quarter ended May 8, 2013, the income taxes related to continuing operations resulted in a tax provision of $1.5 million compared to a tax provision of $1.5 million for the quarter ended May 9, 2012.

For the three quarters ended May 8, 2013, the income taxes related to continuing operations resulted in a tax provision of $2.1 million compared to a tax provision of $2.5 million for the three quarters ended May 9, 2012.

Discontinued Operations

The loss from discontinued operations was $0.1 million in the quarter ended May 8, 2013 compared to a loss of $0.1 million in the quarter ended May 9, 2012.The loss from discontinued operations of $0.1 million in the quarter ended May 8, 2013 included $0.2 million in carrying costs associated with assets related to discontinued operations offset by an income tax benefit of $0.1 million. The loss of $0.1 million from discontinued operations in the quarter ended May 9, 2012 included $0.2 million in carrying costs associated with assets related to discontinued operations offset by an income tax benefit of $0.1 million.

The loss from discontinued operations was $0.6 million in the three quarters ended May 8, 2013 compared to a loss of $0.7 million in the three quarters ended May 9, 2012. The loss of $0.6 million for the three quarters ended May 8, 2013 included (1) $0.4 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 $0.7 million in the three quarters ended May 9, 2012 included (1) $0.6 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; (3) a net loss of $0.5 million on disposition of assets that we classified as discontinues assets; and (4) $0.9 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 three quarters ended May 8, 2013, cash provided by operating activities was $16.7 million and by financing activities was $6.7 million offset by cash used in investing activities of $23.1 million. Cash and cash equivalents increased $0.4 . . .

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