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LUB > SEC Filings for LUB > Form 10-K on 12-Nov-2013All Recent SEC Filings

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Form 10-K for LUBYS INC


12-Nov-2013

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 28, 2013, ("fiscal year 2013"), August 29, 2012 ("fiscal year 2012"), and August 31, 2011 ("fiscal year 2011") included in Item 8 of this report.

Overview

In fiscal year 2013, we generated revenues primarily by providing quality food to customers at our 93 Luby's Cafeteria branded restaurants located primarily in Texas, 62 Fuddruckers restaurants located throughout the United States, 2 Koo Koo Roo restaurants in California, 23 Cheeseburger in Paradise Restaurants, and 116 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. On December 6, 2012, we further expanded our brand family with the addition of the Cheeseburger in Paradise brand. This added 23 full service restaurant and bar locations that complement our core family-friendly brands and provided an entry point to operate in 23 new locations at a cost of less than $0.5 million per restaurant. 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 2013 and 2012, we continued to operate our two core brands, Luby's Cafeterias and Fuddruckers, 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. We also integrated the 23 Cheeseburger in Paradise restaurants into our systems and processes. We streamlined the menu and upgraded the quality, including an improved burger and bun. As the integration progressed, we moved the Cheeseburger in Paradise locations into our consolidated purchasing network. We have elevated the operations to a higher level of service by installing the right people guided by the right culture.

Since the acquisition of Fuddruckers, we have opened six Fuddruckers franchise units, six new prototype Company units and acquired four units from franchisees. We have grown sales at our Fuddruckers restaurants in each of the three full fiscal years since the acquisition. We achieved this sales growth through a combination of local market outreach, upgrading the décor at selected locations, and training our restaurant management and crews to achieve 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 have been encouraged by the first two years of results of our newest location 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. We followed up that project with development of a side-by-side Luby's cafeteria and Fuddruckers restaurant on a single parcel of land. This development opened on the first day of fiscal year 2013 and has also provided us additional confidence that we are able to leverage our investment costs, offer our guests a wider range of options at one location, and achieve superior cash flow returns from new models. This prototype is now a significant component of our near term growth strategy. Beginning in fiscal year 2012 and continuing through fiscal year 2013, the Luby's 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. These catering efforts were expanded into the Fuddruckers brand in fiscal 2013 where our capability continues to grow. 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 Luby's Cafeteria locations in fiscal year 2011 continued to contribute to our sales volume in fiscal year 2013.

Store level profit margin declined to 12.8% in fiscal year 2013 compared to 15.4% in fiscal year 2012. The inclusion of Cheeseburger in Paradise in our results for the portion of the year that we operated such restaurants reflected 140 basis points of the decline in store level profit. Excluding the impact of Cheeseburger in Paradise, store level profit margin was 14.2% in fiscal year 2013 compared to 15.4% in fiscal year 2012, or a decline of 120 basis points. The decrease in store level profit margin resulted primarily from increases in expenses in the areas of food commodity costs, utility costs, and marketing investments and to a lesser degree from restaurant supplies and services. While food commodity prices were relatively stable at our Fuddrucker brand, we experienced an approximate 3% increase in commodity prices at our Luby's cafeteria brand. Average customer spend increased 1.2% at our Luby's cafeteria restaurants and 2.3% at our Fuddruckers restaurants. At the cafeteria locations, these increases were driven primarily by a change in menu mix and encouraging purchase of "add-on" items, rather than menu item price increases. At Fuddruckers, these increases were achieved through a combination of highlighting specialty burgers on the menu boards, encouraging the purchase of add-on menu items, reducing the level of discounting, and modest price increases on select menu items. These increases in average customer spend, however, were offset by declines in guest traffic. Guest traffic at our Luby's Cafeteria restaurants declined 0.9% and guest traffic at our Fuddruckers restaurants declined 2.1%. Our goal in fiscal year 2014 will continue to 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 $31.3 million in fiscal year 2013 from $25.8 million in fiscal year 2012. This capital investment included the development of one relocated Luby's cafeteria restaurant and six Fuddruckers restaurants that we either developed, refurbished pre-existing spaces, or purchased from franchisees. In addition, at the end of fiscal year 2013, we had an additional five restaurants under development with varying levels of capital committed. We also invested capital for funding our remodeling program and recurring maintenance capital, including infrastructure projects, as well as for acquiring land for restaurant development projects. We remain committed to maintaining the attractiveness of all of our restaurant locations where we anticipate operating over the long term. In addition to these capital investments, we also invested $10.3 million in cash plus customary working capital adjustments in fiscal year 2013 for the acquisition of the Cheeseburger in Paradise brand and its 23 restaurant locations. In fiscal year 2014, we anticipate making capital investments of between $35 million and $40 million, primarily for construction of new restaurants with opening dates in fiscal year 2014 and early fiscal year 2015, maintaining and remodeling of existing units, and purchases of property for restaurant development.

Our capital expenditures and acquisition investment in fiscal year 2013 were funded through a combination of cash from operations, sale of property at locations that were closed as part of our Cash Flow Improvement and Capital Redeployment Plan announced in October 2009, and utilization of our revolving credit facility. As a result, our debt balance at the end of fiscal year 2013 increased to $19.2 compared to $13.0 million at the end of fiscal year 2012. In August 2013, we amended and restated our credit facility agreement with our bank group. As part of the renewal terms, we have increased our line of credit from $50 million to $70 million, removed the annual capital expenditure limitation, and realized a slight reduction in the interest margin that we pay. The renewal will provide for increased access to capital for growth, extending our credit facility from a previous maturity date of September 1, 2014 to a new maturity date of September 1, 2017. Our debt balance at end of fiscal year 2013 represents 27% of our total borrowing capacity under our revolving line of credit.

Fiscal Year 2013 Review

Same-store sales at our restaurant units for fiscal year 2013 were unchanged compared to fiscal year 2012. Same-store sales comparisons for fiscal year 2013 to fiscal year 2012 were positive in our fiscal first and fourth quarters and negative in our second and third quarters. The Luby's Cafeteria brand and Fuddruckers brand each increased same store sales by 0.2% for fiscal year 2013 compared to fiscal 2012. Our two Koo Koo Roo restaurants saw same-store sales declines of 18.9% for fiscal year 2013 compared to fiscal year 2012.

Income from continuing operations declined $3.4 million from $7.6 million, or $0.27 per share, on $350.1 million in total sales in fiscal year 2012 to $4.2 million, or $0.15 per share, on $390.3 million in total sales in fiscal year 2013. This profitability decline was the result of declining store level profit (defined as restaurant sales less food costs, payroll and related cost, Other operating expenses, and occupancy costs), and the partial year negative impact of including Cheeseburger in Paradise results. Store level profit as a percentage of restaurant sales declined 2.6% in fiscal year 2013 compared to fiscal year 2012. Excluding the impact of Cheeseburger in Paradise from the financial results, store level profit, as a percentage of restaurant sales declined 1.2%.

? Food costs, as a percentage of restaurant sales increased to 28.7% in fiscal year 2013 from 27.9% in fiscal year 2012. Excluding the impact of Cheeseburger in Paradise, food costs as a percentage of restaurant sales increased to 28.3% in fiscal year 2013 compared to 27.9% in fiscal year 2012. The increase in food costs as a percentage of restaurant sales is due primarily to higher food commodity prices in fiscal year 2013 compared to fiscal year 2012 and lower food rebates in fiscal year 2013 compared to fiscal year 2012.

? Payroll and related costs, as a percentage of restaurant sales, decreased to 34.5% in fiscal year 2013 from 34.6% in fiscal year 2012. Excluding the impact of Cheeseburger in Paradise, Payroll and related costs, as a percentage of restaurant sales decreased to 34.0% in fiscal year 2013 compared to 34.5% in fiscal year 2012. Payroll and related costs as a percentage of sales improved as crew labor costs decreased as result of better labor scheduling processes adopted during fiscal year 2012 and continued into fiscal year 2013, including the ability to react more quickly to changes in customer traffic.


? Operating expenses, as percentage of restaurant sales, increased to 18.1% in fiscal year 2013 compared to 16.6% in fiscal year 2012. Excluding the impact of Cheeseburger in Paradise, Operating expenses, as a percentage of restaurant sales increased to 17.7% in fiscal year 2013 compared to 16.7% in fiscal year 2013. The increase was due to significant increase in utilities and increased marketing spend, as well as increases in restaurant supply and service costs, partially offset by reductions in repairs and maintenance expenses.

? Occupancy costs as a percentage of restaurant sales increased to 5.9% in fiscal year 2013 compared to 5.5% in fiscal year 2012. Excluding the impact of Cheeseburger in Paradise, Occupancy costs as a percentage of restaurant sales increased to 5.7% in fiscal year 2013 compared to 5.5% in fiscal year 2012.

? Depreciation expense increased $0.6 million in fiscal year 2013 compared to fiscal year 2012 due primarily to the addition of Cheeseburger in Paradise assets to the depreciable base. The increase in depreciation due to investments made in new locations as well as the capital we have used for remodeling existing locations was mostly offset by certain existing assets reaching the end of their depreciable lives during fiscal year 2013.

? General and administrative expenses increased by $1.4 million reflecting primarily the inclusion of Cheeseburger in Paradise into our operations.

? Interest expense was unchanged at $0.9 million for both fiscal year 2013 and 2012 on similar average debt balances and interest rates.

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

Our Culinary Contract Services business generated $16.7 million in revenue during fiscal year 2013 compared to $17.7 million in revenue during fiscal year 2012. 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 each of our brands, including the Fuddruckers franchise network, as well as growing our Culinary Contract Services business. We are also committed to making capital investments with suitable return characteristics. We plan to use cash generated from operations combined with our borrowing capacity when necessary in order to seize these capital investment opportunities. 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 2013 and 2012 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 year 2012. The Cheeseburger in Paradise stores that were acquired in December 2012 will be included in the same store metric beginning with the first quarter of fiscal year 2015. 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 were unchanged for fiscal year 2013, increased 2.2% for fiscal year 2012, and increased 2.5% for fiscal year 2011.


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

Fiscal Year 2013 Fiscal Year 2012 Fiscal Year 2011 Increase (Decrease) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Same-store sales 0.5 % (0.1 %)% (0.6 )% 0.2 % 2.4 % 1.1 % 2.2 % 3.5 % (0.6 )% 3.5 % 2.7 % 5.5 %

Discontinued Operations

Our Cash Flow Improvement and Capital Redeployment Plan approved in fiscal year 2010 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.

Classification of Expenses on the Statement of Operations:

Beginning with fiscal year 2014, we began classifying restaurant group health insurance expenses in our Payroll and related expense line item where previously these expenses were classified in our Other operating expense line item. We have also reclassified the expense associated with matching employee 401k contributions and certain employee meal benefits from our Other operating expense line to our Payroll and Related expense line. Fiscal year 2013 and all previously reported periods reflect this re-classification. We believe this presentation provides more comparability with a number of other restaurant companies.

In addition, we have included a separate expense line item for Occupancy costs. These costs which include restaurant property lease expenses, property taxes, and common area maintenance charges were previously included within our Other operating expense line item. Fiscal year 2013 and all previously reported periods reflect this reclassification. We believe this presentation provides more comparability with a number of other restaurant companies and is more informative.

These changes have no impact on our reported store level profit defined as restaurant sales less Cost of food less Payroll and related costs, less Other operating costs, less Occupancy costs.

RESULTS OF OPERATIONS

Fiscal Year 2013 (52 weeks) compared to Fiscal Year 2012 (52 weeks)

Sales

Total company sales increased approximately $40.3 million, or 11.5%, in fiscal year 2013 compared to fiscal year 2012, consisting primarily of a $41.6 million increase in restaurant sales, offset by a $1.0 million decrease in Culinary Contract Services sales, a $0.3 million decrease in franchise revenue, and a $0.1 million decrease in 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 approximately $41.6 million in fiscal year 2013 compared to fiscal year 2012. The increase in restaurant sales included a $35.7 million contribution from the 23 Cheeseburger in Paradise restaurants, a $3.8 million increase in sales at Luby's Cafeteria branded restaurants and a $4.0 million increase in sales from Fuddruckers branded restaurants offset by a $1.9 million decrease in Koo Koo Roo branded restaurants.

On a same store basis, restaurant sales were unchanged for fiscal year 2013 compared to fiscal year 2012. The unchanged same-store sales level is primarily due to a continued very competitive operating environment and greater levels of economic uncertainty. Maintaining our level of same store sales was achieved by growth in certain areas of our business, such as catering orders, remodeled restaurants, and in certain geographical markets where we have been able to grow sales, as well as through sustained marketing efforts. These areas of sales growth were offset by other markets where sales growth proved more challenging.

Cost of Food

Food costs increased approximately $14.6 million, or 16.1%, in fiscal year 2013 compared to fiscal year 2012 due primarily to the addition of new restaurants, including 23 Cheeseburger in Paradise-branded stores. Food commodity prices for our basket of food commodity purchases were also higher due to a 3% increase for our Luby's Cafeteria branded restaurants. Food commodity costs at our cafeteria restaurants were higher across all product categories except for oils and shortenings. The basket of food commodity purchases at Fuddruckers branded restaurants was stable in fiscal year 2013 compared to fiscal year 2012 as higher commodity prices for poultry, buns, and produce were completely offset by the modest price decreases in our core beef products. In addition, total food rebates were lower by approximately $0.5 million in fiscal 2013 compared to fiscal 2012. As a percentage of restaurant sales, food cost increased 0.8% to 28.7% in fiscal year 2013 compared to 27.9% in fiscal year 2012. Removing the impact of Cheeseburger in Paradise, food costs as a percentage of sales increased 0.4% to 28.3% in fiscal year 2013 compared to 27.9% in fiscal year 2012. Removing the impact of Cheeseburger in Paradise and removing the impact of lower food rebates, our core food cost as a percentage of sales increased by 0.3% to 28.7% in fiscal 2013 compared to 28.4% in fiscal 2012.


Payroll and Related Costs

Payroll and related costs increased approximately $14.1 million, or 12.5% in fiscal year 2013 compared to fiscal year 2012. Hourly labor costs increased approximately $10.2 million in fiscal year 2013 compared to fiscal year 2012 due primarily to the addition of new restaurants, including 23 Cheeseburger in Paradise branded stores, as well as the typically higher initial labor costs associated with new restaurant openings. These labor cost increases were offset by improvements in labor costs at existing restaurants where refined scheduling techniques adopted in fiscal year 2012 at our cafeteria restaurants were continued in fiscal year 2013 and also deployed into our Fuddruckers restaurants. These enhanced labor scheduling processes include the ability to react more quickly to changes in customer traffic. Restaurant management labor costs increased $3.9 million in fiscal year 2013 compared to fiscal year 2012 due primarily to the addition of new restaurants, including the 23 Cheeseburger in Paradise branded restaurants. As a percentage of restaurant sales, Payroll and Related costs decreased 0.1% to 34.5% in fiscal year 2013 compared to 34.6% in fiscal year 2012. Removing the impact of Cheeseburger in Paradise, Payroll and Related costs as a percentage of sales decreased 0.5% to 34.0% from 34.5% in fiscal year 2012. The decrease as a percentage of sales was achieved primarily by refined scheduling techniques noted above.

Other Operating Expenses

Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, and services. Other operating expenses increased approximately $12.4 million, or 22.9%, in fiscal year 2013 compared to fiscal year 2012 due in part to an $8.1 million increase from the addition of 23 Cheeseburger in Paradise branded restaurants. Other operating expenses at our Luby's Cafeteria and Fuddruckers branded restaurants increased $4.3 million due to a net increase in restaurant locations and (1) an approximate $1.2 million increase in utility expense as we realized higher electricity and gas rates; (2) an approximate $1.0 million higher marketing and advertising expense due to increased billboard advertising, direct mail programs, local sponsorships, and enhanced point-of-purchase advertising; (3) an approximate $1.0 million increase in restaurant services, including higher credit card fees due to increased use of credit cards, deployment of new hardware and software into the restaurant operating environment, and higher beverage dispensing costs with the rollout of our Coke FreeStyle offering; (4) $0.7 million higher restaurant supplies and other costs, including increases in food to go packaging to support higher catering volumes; offset by (5) approximately $0.5 million lower repairs and maintenance expense. As a percentage of restaurant sales, Other operating expenses increased 1.5%, to 18.1%, in fiscal year 2013 compared to 16.6% in fiscal year 2012. Removing the impact of Cheeseburger in Paradise, Other operating expenses as a percent of sales increased 1.0% to 17.7% in fiscal year 2013 compared to 16.7% in fiscal year 2012.

Occupancy Costs

Occupancy costs increased approximately $3.6 million in fiscal year 2013 compared to fiscal year 2012, in large part due to the 23 acquired Cheeseburger in Paradise branded restaurants contributing $2.8 million in occupancy costs from the acquisition date of December 6, 2012 through the end of fiscal year 2013. New leased Fuddruckers locations contributed another $0.4 million to Occupancy costs. Certain locations also realized higher property tax expenses contributing to higher overall Occupancy cost.

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 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 $0.3 million in fiscal year 2013 compared to fiscal year 2012 which included a $0.2 million decrease in franchise fees and a $0.1 million decrease in franchise royalties. During the year, there were nine franchise units that closed on a permanent basis. We ended fiscal year 2013 with 116 Fuddruckers franchise units in the system. As of November 4, 2013, we are the franchisor to 115 franchisee owned and operated units.


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 varied between 18 and 21 client locations through fiscal year 2013 and also between 18 and 21 client locations in 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 charge a generally fixed fee. These agreements typically present lower financial risk to the company.

Culinary Contract Services Revenue

Culinary Contract Services revenue decreased $1.0 million, or 5.7% in fiscal year 2013 compared to fiscal year 2012. While the number of locations has varied, we believe we now operate with a stronger mix of clients. 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, and . . .

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