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LUB > SEC Filings for LUB > Form 10-Q on 20-Dec-2013All Recent SEC Filings

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Form 10-Q for LUBYS INC


20-Dec-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 November 20, 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 28, 2013.

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 November 20, 2013, we owned and operated 179 restaurants, of which 93 are traditional cafeterias, 62 are gourmet hamburger restaurants, 22 are casual dining restaurants and bars, one is an upscale fast serve chicken restaurant, 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 November 20, 2013, we operated 21 Culinary Contract Services 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 November 20, 2013, we are a franchisor for a network of 116 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 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 First Quarter Fiscal 2014 versus the First Quarter Fiscal 2013

Sales

Total sales increased approximately $7.9 million, or 9.9%, in the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012, consisting primarily of a $7.5 million increase in restaurant sales and a $0.4 million increase in Culinary Contract Sales. Other components of total sales include vending revenue and franchise revenue, which was consistent in the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012.

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 $7.5 million in the quarter ended November 20, 2013, compared to the quarter ended November 21, 2012. The increase in restaurant sales included an $8.8 million increase due to the acquisition of 23 Cheeseburger in Paradise-branded stores, a $0.7 million decrease in sales from Fuddruckers and Koo Koo Roo-branded restaurants and a $0.6 million decrease in sales at Luby's Cafeteria-branded restaurants. In addition, ten new stores were added over the last 18 accounting periods, and thus not yet in our same store groupings, added another $1.1 million. Six units that have closed since last year deducted $1.5 million from restaurant sales, and the decline in same store sales deducted another $0.9 million. On a same-store basis, restaurant sales decreased 1.3%. Adjusting for timing of Thanksgiving, which fell one week later in our fiscal year and is a high-sales volume period for our Luby's Cafeterias, same stores increased 1.1%. On this calendar adjusted basis, same-store sales at our Luby's Cafeteria restaurants increased 2.4% in the fiscal quarter ended November 20, 2013 compared to the fiscal quarter ended November 21, 2012. At our Luby's Cafeteria restaurants, guest traffic grew 1.6% and per person average spend increased 0.7%. At our Fuddruckers restaurants, same-store sales decreased 2.3% in the fiscal quarter ended November 20, 2013 compared to the quarter ended November 21, 2012. Guest traffic declines of 4.8% were partially offset by average spend per customer increases 2.7%. The increase in per person average spend was a result of altering the mix of menu items offered and selected by our customers and modest price increases.

Cost of Food

Food costs increased approximately $2.5 million, or 12.1%, in the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012 due primarily to the addition of 23 Cheeseburger in Paradise-branded stores. As a percentage of restaurant sales, food cost increased 0.5% to 28.7% in the quarter ended November 20, 2013, compared to the quarter ended November 21, 2012. Removing the impact of Cheeseburger in Paradise, food costs as a percentage of sales decreased 0.1% to 28.1% for the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012. Food commodity prices for our basket of food commodity purchases increased 2.0% at our Luby's Cafeterias and 6.0% at our Fuddruckers restaurants. These commodity cost increases were partially offset by menu price increases during the quarter ended November 20, 2013 compared to the quarter ended November 20, 2012.

Payroll and Related Costs

Payroll and related costs increased approximately $2.9 million in the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012 due to the addition of 23 Cheeseburger in Paradise restaurants. Removing the impact of Cheeseburger in Paradise, Payroll and Related expenses decreased $1.1 million. The labor costs at our core brands of Luby's and Fuddruckers decreased primarily due to improved hourly labor deployment, including the ability to react more quickly to changes in guest traffic. As a percentage of restaurant sales, payroll and related costs increased, 0.3%, to 35.4% in the quarter ended November 20, 2013 compared to 35.1% in the quarter ended November 21, 2012, primarily due to the acquisition of Cheeseburger in Paradise-branded stores offset by improvements in labor costs at existing restaurants. Excluding Cheeseburger in Paradise, payroll and related costs as a percent of restaurant sales decreased 0.9% to 34.2% in the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012.


Other Operating Expenses

Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, services and supplies. Other operating expenses increased by approximately $2.2 million, or 16.3%, in the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012, due to a $2.3 million increase from the addition of 23 Cheeseburger in Paradise-branded stores. Other operating expenses at our Luby's Cafeteria and Fuddruckers brand restaurants decreased $0.1 million due to (1) an approximate $0.4 million decrease in repairs and maintenance expense and (2) an approximate $0.1 million decrease in restaurant supplies and services; offset by
(3) an approximate $0.1 million increase in marketing and advertising due to increased billboard advertising, direct mail programs, and enhance point-of-purchase advertising; (4) an approximate $0.1 million increase in utilities and (5) a $0.2 million increase in insurance and other expenses. As a percentage of restaurant sales, other operating expenses increased 1.0%, to 19.1%, in the quarter ended November 20, 2013 compared to 18.1% in the quarter ended November 21, 2012, due to the addition of 23 Cheeseburger in Paradise branded restaurants. Excluding the impact of Cheeseburger in Paradise, other operating expenses as a percentage of sales increased to 18.2% in the quarter ended November 20, 2013 compared to 18.1% in the quarter ended November 20, 2013.

Occupancy Costs

Occupancy costs include property lease expense, property taxes, and common area maintenance charges. Occupancy cost increased $1.0 million to $5.0 million in the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012.

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 and (2) franchise fees paid to us when franchise units are opened for business or transferred to new owners. Franchise revenue decreased $8 thousand in the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012. The $8 thousand decrease in franchise revenue includes a $25 thousand decrease in franchise royalties offset by a $17 thousand increase in non-royalty related fee income.

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 21 client locations at the quarter ended November 20, 2013 and 18 at the quarter ended November 21, 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 increased $0.4 million, or 11.2%, in the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012. The increase in revenue was primarily due to an increase in the number of locations where we operate. We operated at 21 locations as of November, 20, 2013 compared to 18 locations as of November 20, 2012.

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 increased approximately $0.2 million, or 5.9%, in the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012, consistent with an increase in Culinary Contract Revenue. We expanded our profit margin in this business segment to 14.0% of culinary contract services revenue in the quarter ended November 20, 2013 from 9.8% for the quarter ended November 21, 2012.


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 $0.4 million in the quarter ended November 20, 2013 compared to approximately $0.2 million in the quarter ended November 21, 2012. The quarter ended November 20, 2013 and the quarter ended November 21, 2012 included carrying costs of locations to be developed for future restaurant openings. The opening cost in the quarter ended November 20, 2013 also included the opening costs for one Luby's Cafeteria opened during the quarter ended November 20, 2013.

Depreciation and Amortization

Depreciation and amortization expense increased by approximately $0.3 million, or 7.2%, in the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012, due the addition of depreciation related to Cheeseburger in Paradise assets and new capital expenditures for new construction and remodel activity offset by the reduction in depreciation related to 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. Most of the increase in general and administrative expense is attributable to the incremental salary and benefits, travel, and professional fees related to the acquisition of Cheeseburger in Paradise. General and administrative expenses increased $0.7 million, or 8.8%, in the quarter ended November 20, 2013 compared to the quarter ended November 21, 2012. As a percentage of total revenue, general and administrative expenses decreased to 9.2% in the quarter ended November 20, 2013, compared to 9.3% in the quarter ended November 21, 2012.

Provision for asset impairments, net

The impairment charge of $0.4 million for the quarter ended November 20, 2013 is related to one operating Fuddruckers location, two Cheeseburger in Paradise locations that closed after the quarter ended and one Cheeseburger in Paradise location that was converted to a Fuddruckers.

The asset impairment of $0.1 million in the quarter ended November 21, 2012 was related to one operating Fuddruckers restaurant at a leased 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 November 20, 2013 and includes the sale of one property held for sale and other normal asset retirement activity. The loss or gain on disposition of property and equipment was a gain of approximately $0.2 million in the quarter ended November 21, 2012 and includes the gain on disposal of assets at a Koo Koo Roo leased location net of asset retirements.

Interest Income

Interest income was $2 thousand in the quarter ended November 20, 2013 and in the quarter ended November 21, 2012.

Interest Expense

Interest expense was approximately $0.3 million in the quarter ended November 20, 2013 and approximately $0.2 million in the quarter ended November 20, 2012 due to slightly higher debt balances and interest rates.

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 November 20, 2013 increased approximately $0.1 million compared to the quarter ended November 21, 2012 related to higher net rental property income.


Taxes

For the quarter ended November 20, 2013, the income taxes related to continuing operations resulted in a tax benefit of $0.9 million compared to a tax provision of $0.1 million for the quarter ended November 21, 2012. This benefit was due to the loss before taxes and discontinued operations in the quarter ended November 20, 2013 compared to the income before taxes and discontinued operations in the quarter ended November 21, 2012.

Discontinued Operations

The loss from discontinued operations was $0.1 million in the quarter ended November 20, 2013 and $0.1 million in the quarter ended November 21, 2012. The loss from discontinued operations of $0.1 million in the quarter ended November 20, 2013 primarily consist of carrying costs associated with assets related to discontinued operations and, an impairment charge offset by an income tax benefit.

The loss of $0.1 million from discontinued operations in the quarter ended November 21, 2012 included $0.1 million in carrying costs associated with assets related to discontinued operations offset by an income tax benefit of $39 thousand.

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 quarter ended November 20, 2013, cash provided by operating activities was $3.9 million and by financing activities was $5.1 million offset by cash used in investing activities of $8.7 million. Cash and cash equivalents increased $0.3 million in the first quarter fiscal 2014 compared to $0.7 million increase in the first quarter fiscal 2013. 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:

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 Culinary Contract Services 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:

                                                      Quarter Ended
                                             November 20,       November 21,
                                                 2013               2012
                                              (12 weeks)         (12 weeks)
                                                     (In thousands)
Total cash provided by (used in):
Operating activities                        $        3,940     $        6,586
Investing activities                                (8,740 )           (4,354 )
Financing activities                                 5,100             (1,500 )
Net Increase in cash and cash equivalents   $          300     $          732

Operating Activities. Cash flow from operating activities was $3.9 million in the first quarter fiscal 2014, a $2.6 million decrease from the first quarter fiscal 2013. The $2.6 million decrease in cash is due to a $1.2 million decrease in cash from operations before changes in operating assets and liabilities plus a $1.4 million decrease in cash generated by changes in operating assets and liabilities for the quarter ended November 20, 2013.


Cash generated by operating activities before changes in operating assets and liabilities was $2.6 million in the first quarter fiscal 2014, a $1.6 million decrease compared to the first quarter fiscal 2013. The $1.6 million decrease in cash provided by operating activities before changes in operating assets and liabilities was due to less cash generated by segment level profit of $1.1 million for Company-owned restaurants and $0.1 million increase in cash used for opening costs.

Changes in operating assets and liabilities was a $1.3 million source of cash in the first quarter fiscal 2014 and a $2.4 million source of cash in the first quarter fiscal 2013. The $1.1 million decrease in the source of cash was due to differences in the change in asset and liability balances during the quarter ended November 20, 2013 and November 21, 2012. Increases in current asset accounts are a use of cash while decreases in current asset accounts are a source of cash. During the quarter ended November 20, 2013, the change in trade accounts and other receivables was a $0.3 million source of cash which was $0.4 million greater than the quarter ended November 21, 2012. The change in inventory during the quarter ended November 20, 2013 was a $2.0 million use of cash which was a $0.6 million increase from the quarter ended November 21, 2012. The change in prepaid expenses and other assets was a $1.0 million source of cash during the quarter ended November 20, 2013, which was $0.9 million less than the quarter ended November 21, 2012.

Increase in current liability accounts are a source of cash, while decreases in current liability accounts are a use of cash. During the quarter ended November 20, 2013, changes in the balances of accounts payable, accrued expenses and other liabilities was a $2.0 million source of cash, compared to a source of cash of $1.2 million during the quarter ended November 21, 2012.

Investing Activities. We generally reinvest available cash flows from operations to develop new restaurants, enhance existing restaurants and to support Culinary Contract Services. Cash used by investing activities was $8.7 million in the quarter ended November 20, 2013 and $4.4 million in the quarter ended November 21, 2012. Capital expenditures were $9.2 million in the quarter ended November 20, 2013, a $4.3 million increase compared to the quarter ended November 21, 2012. Proceeds from the disposal of assets were $0.5 million in the first quarter fiscal 2014 and in the first quarter fiscal 2013.

Financing Activities. Cash provided by financing activities was $5.1 million in the quarter ended November 20, 2013 compared to a $1.5 million use of cash during the quarter ended November 21, 2012. Cash flows from financing activities was primarily the result of borrowings and repayments related to our revolving credit facility. During the quarter ended November 20, 2013, borrowings exceeded repayments by $5.1 million. During the quarter ended November 21, 2012, repayments of the credit facility exceeded borrowings by $1.5 million.

Status of Long-Term Investments and Liquidity

At November 20, 2013, we did not hold any long-term investments.

Status of Trade Accounts and Other Receivables, Net

We monitor the aging of our receivables, including Fuddruckers franchising related receivables, and record provisions for uncollectable accounts, as appropriate. Credit terms of accounts receivable associated with our Culinary Contract Services business vary from 30 to 45 days based on contract terms.

Working Capital

Current assets increased $1.0 million in the first quarter fiscal 2014 compared to a decrease of $0.4 million in the first quarter fiscal 2013. In the first quarter fiscal 2014, cash increased $0.3 million and food and supply inventory increased $2.0 million; partially offset by decreases in trade accounts and other receivables of $0.3 million and prepaid expenses of $1.0 million. In the first quarter fiscal 2013, food and supply inventories increased $1.4 million while prepaid expenses decreased $1.8 million and trade accounts and other receivable decreased $0.6 million.

Current liabilities increased $1.9 million in the first quarter fiscal 2014 compared to a $1.4 million increase in the first quarter fiscal 2013. In the first quarter fiscal 2014, accounts payables increased $1.0 million and accrued expenses and other liabilities increased $0.8 million. In the first quarter fiscal 2013 accounts payables increased $1.8 million and accrued expenses and other liabilities decreased $0.4 million.

Capital Expenditures

Capital expenditures consist of purchases of real estate for future restaurant sites, Culinary Contract Services investments, new unit construction, purchases of new and replacement restaurant furniture and equipment, and ongoing remodeling programs. Capital expenditures for the first quarter fiscal 2014 were approximately $9.2 million and related to new restaurant construction, recurring maintenance and remodels of our existing units, improvement of our Culinary Contract Services business and the development of future restaurant sites. We expect to be able to fund all capital expenditures in fiscal 2014 using proceeds from the sale of assets, cash flows from operations and our available credit. We expect to spend approximately $35 million to $40 million on capital expenditures in fiscal 2014.


DEBT

Revolving Credit Facility

In August 2013, we entered into a revolving credit facility with Wells Fargo Bank, National Association, as Administrative Agent, and Amegy Bank, National Association, as Syndication Agent. The following description summarizes the material terms of the revolving credit facility, (the revolving credit facility is referred to as the "2013 Credit Facility"). The 2013 Credit Facility is governed by the credit agreement dated as of August 14, 2013 (the "2013 Credit Agreement") among us, the lenders from time to time party thereto, Wells Fargo Bank, National Association, as Administrative Agent, and Amegy Bank, National Association, as Syndication Agent. The 2013 Credit Agreement amends and restates the 2009 Credit Agreement in its entirety. The maturity date of the 2013 Credit Facility is September 1, 2017.

The aggregate amount of the lenders' commitments under the 2013 Credit Facility was $70.0 million as of November 20, 2013. The 2013 Credit Facility also provides for the issuance of letters of credit in a maximum aggregate amount of $5.0 million outstanding as of August 14, 2013 and $15.0 million outstanding at any one time with prior written consent of the Administrative Agent and the Issuing Bank. At November 20, 2013, under the 2013 Credit Facility, after applying the Lease Adjusted Leverage Ratio limitation (as defined in the 2013 Credit Agreement), the available borrowing capacity was $41.0 million.

The 2013 Credit Facility is guaranteed by all of our present subsidiaries and will be guaranteed by our future subsidiaries. In addition to the bank's increased commitment under the 2013 Credit Agreement, it may be increased to a maximum commitment of $90 million.

At any time throughout the term of the 2013 Credit Facility, we have the option to elect one of two bases of interest rates. One interest rate option is the greater of (a) the Federal Funds Effective Rate plus 0.50%, or (b) prime, plus, . . .

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