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LUB > SEC Filings for LUB > Form 10-Q on 16-Jun-2014All Recent SEC Filings

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Form 10-Q for LUBYS INC


16-Jun-2014

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 7, 2014 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 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., Bob Luby's Seafood 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 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 6, 2012.

As of May 7, 2014, we owned and operated 179 restaurants, of which 94 are traditional cafeterias, 68 are gourmet hamburger restaurants, 15 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 May 7, 2014, we operated 26 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 May 7, 2014, we are a franchisor for a network of 112 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. A restaurant's sales results are included in the same-store sales calculation in the quarter after a store has been open 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 Third Quarter and Year-to-Date Fiscal 2014 versus the Third Quarter and Year-to-Date Fiscal 2013

Sales

Total sales increased approximately $0.9 million, or 0.9%, in the quarter ended May 7, 2014 compared to the quarter ended May 8, 2013, consisting primarily of a $0.4 million increase in restaurant sales and a $0.4 million increase in Culinary Contract Sales. The other components of total sales are franchise revenue and vending income.

Total sales increased approximately $10.5 million, or 4.0%, in the three quarters ended May 7, 2014 compared to the three quarters ended May 8, 2013, consisting primarily of a $9.3 million increase in restaurant sales and a $1.2 million increase in Culinary Contract Sales. The other components of total sales are franchise revenue and vending income.

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

Company-Owned Restaurants

Restaurant Sales

Restaurant sales increased $0.4 million in the quarter ended May 7, 2014, compared to the quarter ended May 8, 2013. The increase in restaurant sales included a $1.3 million increase in sales at Luby's Cafeteria-branded restaurants, a $0.6 million decrease in sales from Fuddruckers-branded restaurants, a $1.7 million increase in sales at locations where we have introduced a Luby's Cafeteria and Fuddruckers side-by-side configuration, which we refer to as a combo location and a $2.0 million decrease in sales at Cheeseburger in Paradise restaurants. The increase in sales at our combo locations is related to the addition of our second and third configuration as well as a 2.2% increase in sales at our first such location. On a same-store basis, our Luby's Cafeteria-branded restaurants increased 2.0% year-over-year and our Fuddruckers-branded restaurants decreased 3.9%; total same-store sales increased 0.3%.

The increase in restaurant sales and same-store sales at our Luby's Cafeteria-branded restaurants was due to a 2.0% increase in guest traffic with no significant change in the average spend per guest; approximately 35% of our sales increase resulted from a single cafeteria where we relocated from a mall location into a new building that we constructed on a pad site in front of the mall. In addition, the contribution from one new Luby's Cafeteria opened earlier in the fiscal year was partially offset by absence of sales from two Luby's Cafeteria locations that closed. The decline in sales at our Fuddruckers restaurants resulted from a 3.6% decline in guest traffic and a modest 0.3% decrease in the per person average spend partially offset by the contribution in sales from three new Fuddruckers restaurant openings, net of two Fuddruckers restaurant closings.


Restaurant sales increased $9.3 million in the three quarters ended May 7, 2014, compared to the three quarters ended May 8, 2013. The increase in restaurant sales included, a $6.0 million higher sales contribution from our Cheeseburger in Paradise restaurants, a $3.9 million increase in sales at Luby's Cafeteria-branded restaurants and a $2.1 million decrease in sales from Fuddruckers-branded restaurant, a $1.5 million increase in sales at combo locations.

The $3.9 million increase in sales at our Luby's Cafeteria-branded restaurants was due primarily to a 1.9% increase in same store sales for the three quarters ended May 7, 2014 compared to the three quarters ended May 8, 2013. The $2.1 million decrease in restaurant sales at our Fuddruckers-branded restaurants was due primarily to a 3.0% decrease in same store sales for the three quarters ended May 7, 2014 compared to the three quarters ended May 8, 2013, and the absence of sales from two Fuddruckers locations that closed, net of the partial year contribution to sales from three Fuddruckers locations that opened. The $1.5 million increase in sales at our combo locations is primarily due to the contribution from two new combo location openings in the three quarters ended May 7, 2014. The $6.0 million higher sales contribution from our Cheeseburger in Paradise restaurants reflects operating this brand for the full 36 weeks in the three quarters ended May 7, 2014 compared to operating for only 22 weeks in the three quarters ended May 8, 2013, offset by the closure of eight stores in the three quarters ended May 7, 2014. Of these eight stores, two have re-opened as a Fuddruckers restaurant, three are in the process of being converted into Fuddruckers, and three are slated for disposal.

Cost of Food

Food costs increased approximately $0.1 million, or 0.6%, in the quarter ended May 7, 2014, compared to the quarter ended May 8, 2013 due primarily to an overall increase in guest traffic at our Luby's Cafeteria-branded restaurants and new restaurant openings, offset by traffic declines at our Fuddruckers-branded restaurants. Food commodity prices for our basket of food commodity purchases were higher by approximately 4% at our Luby's Cafeteria-branded restaurants and 3% at our Fuddruckers-branded restaurants. As a percentage of restaurant sales, food cost was 28.6% in the quarter ended May 7, 2014 and in the quarter ended May 8, 2013. Removing the impact of Cheeseburger in Paradise, food costs as a percent of sales were 28.4% in the quarter ended May 7, 2014 and in the quarter ended May 8, 2013.

Food costs increased approximately $3.1 million, or 4.4%, in the three quarters ended May 7, 2014, compared to the three quarters ended May 8, 2013, due primarily to the addition of the Cheeseburger in Paradise-branded stores and increased guest traffic at our Luby's Cafeteria-branded restaurants and new restaurant openings. Removing the impact of Cheeseburger in Paradise, food costs increased $1.1 million, or 1.6% for the three quarters ended May 7, 2014, compared to the three quarters ended May 8, 2013. For the three quarters ended May 7, 2014, food commodity prices for our basket of food commodity purchases were higher due to an approximate 2% increase for our Luby's Cafeteria-branded restaurants and a 3% increase for our Fuddruckers-branded restaurants. As a percentage of restaurant sales, food cost increased 0.2% to 28.8% in the three quarters ended May 7, 2014, compared 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 7, 2014 and in the three quarters ended May 8, 2013.

Payroll and Related Costs

Payroll and related costs decreased approximately $0.1 million in the quarter ended May 7, 2014 compared to the quarter ended May 8, 2013, due to (1) improved hourly labor deployment with continued progress on matching labor schedules with anticipated daily guest traffic; and (2) an approximate $0.4 million reduction in workers compensation insurance and state payroll tax estimates; partially offset by (3) increases in restaurant management costs as a result of new restaurant openings, including management training costs; and (4) higher variable compensation at our Luby's cafeteria restaurants. As a percentage of restaurant sales, payroll and related costs decreased 0.3%, to 33.3% in the quarter ended May 7, 2014, compared to 33.6% in the quarter ended May 8, 2013 due to the ability to leverage these costs on higher overall sales volumes and lower workers compensation expense and payroll tax expense. Excluding Cheeseburger in Paradise, payroll and related costs, as a percentage of sales, were 33.0% in the quarter ended May 7, 2014 compared to 33.2% in the quarter ended May 8, 2013.

Payroll and related costs increased approximately $3.0 million in the three quarters ended May 7, 2014, compared to the three quarters ended May 8, 2013, primarily due to the addition of new restaurants at our Luby's Cafeteria and Fuddruckers brands, as well as operating Cheeseburger in Paradise locations for 36 weeks in fiscal 2014 compared to operating these locations for only 22 weeks in fiscal 2013, partially offset by a reduction in workers compensation expense of approximately $0.2 million. As a percentage of restaurant sales, payroll and related costs were 34.6% in the three quarters ended May 7, 2014 compared to 34.7% in the three quarters ended May 8, 2013. Excluding the impact of Cheeseburger in Paradise, payroll and related costs, as a percent of restaurant sales, was 33.9% in the three quarters ended May 7, 2014 compared to 34.5% in the three quarters ended May 8, 2013.


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 $0.5 million, or 2.9%, in the quarter ended May 7, 2014 compared to the quarter ended May 8, 2013, primarily due to (1) an approximate $0.5 million increase in utilities expense due in part to a colder than normal winter and higher gas and electricity utility rates; (2) an approximate $0.1 million increase in property insurance expense; (3) an approximate $0.2 million increase in marketing and advertising expense; (4) an approximate $0.2 million increase in restaurant supplies and services expense; partially offset by (5) an approximate $0.5 million reduction in repairs and maintenance expense. As a percentage of restaurant sales, other operating expenses increased 0.4%, to 17.8%, in the quarter ended May 7, 2014 compared to 17.4% in the quarter ended May 8, 2013, due to (1) the cost increases enumerated above and (2) the typically higher operating costs for the four to eight weeks after opening a new restaurant. Excluding the impact of Cheeseburger in Paradise, other operating expenses costs as a percentage of sales were 17.3% in the quarter ended May 7, 2014 compared to 16.9% in the quarter ended May 8, 2013.

Other operating expenses increased by approximately $4.0 million, or 9.4%, in the three quarters ended May 7, 2014 compared to the three quarters ended May 8, 2013, primarily due to (1) operating Cheeseburger in Paradise locations for 36 weeks in fiscal 2014 compared to operating these locations for only 22 weeks in fiscal 2013; (2) increases in utilities, marketing and advertising, and restaurant supplies, services, and insurance at our Luby's Cafeteria and Fuddruckers brands with the opening of one new Luby's Cafeteria, two new Fuddruckers restaurants, an additional two new Fuddruckers restaurants that were converted from Cheeseburger in Paradise locations, and two combo locations; partially offset by (3) an approximate $0.6 million reduction in repairs and maintenance. As a percentage of restaurant sales, other operating expenses increased 0.9%, to 18.4%, in the three quarters ended May 7, 2014 compared to 17.5% in the three quarters ended May 8, 2013, due to (1) the cost increases enumerated above and (2) the typically higher operating costs for the four to eight weeks after opening a new restaurant. Excluding the impact of Cheeseburger in Paradise, other operating expenses costs as a percentage of sales were 17.8 % in the three quarters ended May 7, 2014 compared to 17.2% in the three quarters ended May 8, 2013.

Occupancy Costs

Occupancy costs include property lease expense, property taxes, common area maintenance charges and permits and licenses. Occupancy costs were $4.9 million in the quarter ended May 7, 2014 compared to $5.0 million in the quarter ended May 8, 2013. Occupancy costs increased $0.7 million to $14.6 million in the three quarters ended May 7, 2014 compared to the three quarters 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 royalties paid to us as the franchisor for the Fuddruckers brand and franchise fees paid to us when franchise development agreements are executed and when franchise units are opened for business or transferred to new owners. Franchise revenue increased $44 thousand in the quarter ended May 7, 2014 compared to the quarter ended May 8, 2013. The $44 thousand increase in franchise revenue includes a $37 thousand increase in franchise fees and a $7 thousand increase in franchise royalties.

Franchise revenue increased $43 thousand for the three quarters ended May 7, 2014 compared to the three quarters ended May 8, 2013. The $43 thousand increase in franchise revenue includes a $67 thousand increase in franchise fees offset by a $24 thousand decrease in franchise royalties.

At the quarter ended May 7, 2014, there were 112 Fuddruckers franchise units in the system. Over the prior one year period ended May 7, 2014 our franchisees have opened 4 units. Two of these four locations are located in the United States in North Dakota and California and two of these locations are international locations in the Dominican Republic and Italy. Over the prior one year period ended May 7, 2014 there were also 7 franchise units that closed. Of the 7 franchise units that closed, we acquired 2 units as the franchisor for the Fuddruckers brand. We plan to open these two acquired restaurant locations and operate them under our Fuddruckers brand before the end of fiscal 2014.


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 26 client locations at the quarter ended May 7, 2014 and 19 at the quarter ended May 8, 2013. In fiscal 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 10.6% in the quarter ended May 7, 2014 compared to the quarter ended May 8, 2013. The increase in revenue was primarily due to the increase in the number of locations where we operate.

Culinary Contract Services revenue increased $1.2 million, or 10.1% in the three quarters ended May 7, 2014 compared to the three quarters ended May 8, 2013. The increase in revenue was primarily due to the increase in the number 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 increased approximately $0.4 million, or 11.2%, in the quarter ended May 7, 2014 compared to the quarter ended May 8, 2013, due to a commensurate increase in culinary contract sales volume. Our profit margin in this business segment decreased to 12.4% of Culinary Contract Services revenue in the quarter ended May 7, 2014 from 12.8% in the quarter ended May 8, 2013.

Cost of Culinary Contract Services increased approximately $0.8 million, or 7.3%, in the three quarters ended May 7, 2014 compared to the three quarters ended May 8, 2013, due to a commensurate increase in Culinary Contract Services sales volume. We expanded our profit margin in this business segment to 12.8% of Culinary Contract Services revenue in the three quarters ended May 7, 2014 from 10.6% in the three quarters ended May 8, 2013.

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 $0.3 million in the quarter ended May 7, 2014 compared to less than $0.1 million in the quarter ended May 8, 2013. The quarter ended May 7, 2014 and the quarter ended May 8, 2013 included carrying costs of locations to be developed for future restaurant openings. The quarter ended May 7, 2014 also included the labor, supplies, and other costs necessary to support the opening of one Luby's Cafeteria and one Fuddruckers restaurant.

Opening costs were approximately $1.4 million in the three quarters ended May 7, 2014, compared to approximately $0.5 million in the three quarters ended May 8, 2013. The three quarters ended May 7, 2014 and the three quarters ended May 8, 2013, included carrying costs of locations to be developed for future restaurant openings. The three quarters ended May 7, 2014, also included the labor, supplies, and other costs necessary to support the opening of six Fuddruckers restaurants and three Luby's Cafeterias. Two of the Fuddruckers restaurants that opened in the three quarters ended May 7, 2014 previously operated as Cheeseburger in Paradise restaurants. The three quarters ended May 8, 2013 also included the labor, supplies, and other costs necessary to support the opening of five Fuddruckers restaurants.

Depreciation and Amortization

Depreciation and amortization expense increased by approximately $0.5 million, or 11.7%, in the quarter ended May 7, 2014, compared to the quarter ended May 8, 2013, due to 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 $0.9 million, or 7.0% in the three quarters ended May 7, 2014, compared to the three quarters ended May 8, 2013, due to the addition of depreciation related to Cheeseburger in Paradise, and 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 $1.1 million, or 15.1%, in the quarter ended May 7, 2014 compared to the quarter ended May 8, 2013. The increase was due primarily to an increase in salary and benefits expense, outside professional services costs, technology infrastructure costs, and corporate travel expenses. As a percentage of total revenue, general and administrative expenses increased to 8.6% in the quarter ended May 7, 2014, compared to 7.5% in the quarter ended May 8, 2013.

General and administrative expenses increased by approximately $2.2 million, or 9.9%, in the three quarters ended May 7, 2014, compared to the three quarters ended May 7, 2013. The increase was due primarily to an increase in outside professional services costs, salary and benefits expense, technology infrastructure costs, corporate travel expenses and penalties related to income and payroll taxes. As a percentage of total revenue, general and administrative expenses increased to 9.0% in the three quarters ended May 7, 2014, compared to 8.5% in the three quarters ended May 8, 2013.

Provision for asset impairments, net

The asset impairment of $0.1 million in the quarter ended May 8, 2013, was related to one operating Fuddruckers at a leased location.

The asset impairment of $1.5 million in the three quarters ended May 7, 2014, reflects the impairment of one owned Fuddruckers location, two leased Fuddruckers locations and six Cheeseburger in Paradise locations including goodwill related to Cheeseburger in Paradise and one favorable lease asset. An impairment charge of $0.2 million in the three quarters ended May 8, 2013, was related to one leased Fuddruckers location and one Koo Koo Roo location where the projected future cash flows were not expected to support the value of the assets at the location.

Net Loss (Gain) on Disposition of Property and Equipment

The gain on disposition of property and equipment was approximately $1.0 million in the quarter ended May 7, 2014 and was related primarily to the disposition of an owned Luby's Cafeteria restaurant offset by normal asset retirement activity in our restaurant units. The loss on disposition of property and equipment was 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 gain on dispositions of property and equipment for the three quarters ended May 7, 2014 was approximately $1.0 million and was related primarily to the disposition of an owned Luby's Cafeteria restaurant offset by normal asset retirement activity. 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.

Interest Income

Interest income was $1 thousand in the quarter ended May 7, 2014, compared to $2 thousand in the quarter ended May 8, 2013.

Interest income was $4 thousand in the three quarters ended May 7, 2014, compared to $6 thousand in the three quarters ended May 8, 2013.


Interest Expense

Interest expense in the quarter ended May 7, 2014 was approximately $0.4 million, compared to approximately $0.2 million in the quarter ended May 8, 2013. The increase was due to higher average debt balances.

Interest expense in the three quarters ended May 7, 2014 was $1.0 million, compared to $0.6 million in the three quarters ended May 8, 2013. The increase was due to higher 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 and prepaid sales tax discounts earned through our participation in state tax prepayment programs. Other income, net in the quarter ended May 7, 2014 decreased $11 thousand compared to the quarter ended May 8, 2013. The decrease was primarily due to lower sales tax discounts partially offset by higher net rental income on properties that we lease to third parties.

Other income, net in the three quarters ended May 7, 2014 increased approximately $94 thousand compared to the three quarters ended May 8, 2013. The increase was due to higher net rental income on properties that we lease to third parties.

Taxes

For the quarter ended May 7, 2014, the income taxes related to continuing operations resulted in a tax provision of $1.6 million compared to a tax provision of $1.5 million for the quarter ended May 8, 2013.

For the three quarters ended May 7, 2014, the income taxes related to continuing operations resulted in a tax benefit of $0.9 million compared to a tax provision of $2.0 million for the three quarters ended May 8, 2013.

Discontinued Operations

On March 21, 2014, the Company adopted a disposal plan calling for the closure of four or more Cheeseburger in Paradise units by the end of fiscal 2014 and the conversion of up to nine locations to Fuddruckers units. As of May 7, 2014, eight Cheeseburger in Paradise units have closed; two have re-opened as a Fuddruckers restaurant, three are in the process of being converted into Fuddruckers, and three are slated for disposal. These three Cheeseburger in Paradise locations have been reclassified to discontinued operations in the statements of operations and balance sheet accordingly.

The loss from discontinued operations was $8 thousand in the quarter ended May 7, 2014 compared to a loss of $0.2 million in the quarter ended May 8, 2013. The . . .

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