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Luby's Reports First Quarter Fiscal 2011 Results

2010-12-17

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Luby's Same Store Sales Rise 5.5%

First Quarter Review

Restaurant sales were $70.3 million, an increase of $21.3 million compared to the same quarter last year. During the quarter, same store sales from the 96 Luby’s Cafeterias restaurants rose 5.5%. Robust growth in customer traffic drove the uptick in same store sales, offset by an approximate 6.0% decline in average customer spending, resulting from lower menu prices and increased promotional activity. The company-owned Fuddruckers locations added approximately $19.2 million to restaurant sales.

Table 1: Same Store Sales by Quarter
	Q1	Q2	Q3	Q4	YTD
FY2011 Same-Store Sales (96 stores):	5.5%				5.5%
FY2010 Same-Store Sales (95 or 96 stores):	(13.3%)*	(12.5%)*	(4.8%)*	(0.5%)*	(7.4%)
* 95 stores in Q1FY10 and Q2 FY10; 96 Stores in Q3FY10 and Q4FY10 Note: Fuddruckers locations will not meet the Company's same store sales definition until after 18 consecutive accounting periods; thus are not included in the results reported above.

Table 2: Restaurant Sales (In thousands)
Restaurant Sales	Q1 2011 12 weeks Ending 11/17/2010	Q1 2010 12 weeks Ending 11/18/2009	Variance	%
Luby's Cafeterias (96 stores)	$ 51,103	$ 48,426	$ 2,677	5.5%(2)
Previously Closed (1)		602	(602)
Luby's Concept	51,103	49,028	2,075	4.2%

Fuddruckers and Koo Koo Roo	19,187	—	19,187

Restaurant Sales	$ 70,290	$ 49,028	$ 21,262	43.4%
(1) Stores not included in 2010 Business Plan and reported in continuing operations. (2) Same store sales include only the sales from units operated by the Company for at least 18 months. No sales from Fuddruckers are currently included in same store sales.

Revenue from Culinary Contract Services rose 1.2% to $3.3 million in the first quarter fiscal 2011 compared to the same fiscal quarter last year. Culinary Contract Services operated 18 facilities as of November 17, 2010 versus 15 facilities at the end of the first fiscal quarter last year.
Store level profit, defined as restaurant sales less food costs, payroll and related costs, and other operating expenses, was $6.2 million in the first quarter of fiscal 2011, or 8.8% of restaurant sales, compared to $5.0 million in the first quarter of fiscal 2010, or 10.1% of restaurant sales. The store level profit as a percentage of sales declined due to higher food and occupancy costs, partially offset by lower labor and advertising expenses.
The Company’s top priorities in the first quarter were to drive increased cafeteria customer traffic and to begin implementing enhanced operating procedures at Fuddruckers. Achieving these priorities resulted in lower restaurant operating margins as well as some one time expenditures, in-line with our expectations. These steps were taken to enhance the long-term value of the brands, but resulted in lower restaurant operating margins in the short term and contributed to the loss from continuing operations in the first quarter.
In the first quarter fiscal 2011, Luby’s reported a $2.1 million loss from continuing operations, or $0.07 per share, compared to a loss of $3.0 million in the same quarter last year, or $0.11 per share. Income from operations in the first quarter fiscal 2011 included $0.3 million in after-tax expenses associated with professional fees related to the integration of Fuddruckers. Last year’s results included (1) a $0.2 million after-tax non-cash asset impairment charge, and (2) a non-cash charge of $0.1 million related to a valuation allowance established on the Company’s deferred tax assets, and (3) a $0.3 million after-tax decrease in the fair market value of investments and (4) $0.2 million in after-tax expenses related to a pending legal claim. The table below outlines the special items included in this year’s and last year’s results.

Table 3: Reconciliation of loss from continuing operations, to loss from continuing operations, before special items (1):
	Q1 FY11		Q1 FY10
Item	Amount ($000s)	Per Share ($)	Amount ($000s)	Per Share ($)
Loss from Continuing Operations	$ (2,100)	$ (0.07)	$ (3,026)	$ (0.11)
Asset charges, net	5	0.00	209	0.01
Tax valuation allowance increase			69	0.00
Decrease in fair market value of Investments			303	0.01
Prior year pending legal claim expenses			155	0.01
Fuddruckers legal and professional fees	305	(0.01)
Loss from Continuing Operations, before special items	$ (1,790)	$ (0.06)	$ (2,290)	$ (0.08)
(1) The Company believes excluding special items from its financial results provides investors with a clearer perspective of the Company’s ongoing operating performance and a more relevant comparison to prior period. This information should be considered in addition to the results presented in accordance with GAAP, and should not be considered a substitute for the GAAP results. The Company has reconciled the non-GAAP financial information included in this release to the nearest GAAP measure in context.

Chris Pappas, President and CEO, made the following remarks: “Our improved same store sales results were driven by our store level management’s focus on local marketing initiatives, which included increased limited time offers and Kids Meals priced at $2.99. During the first fiscal quarter, we added seventeen locations serving our $4.99 All You Can Eat Breakfast on the weekends, ending the quarter with sixty-five locations, up from forty-eight at the end of our 2010 fiscal year."

“We made substantial progress integrating the Fuddruckers acquisition during the first fiscal quarter. One of our first steps was increasing the restaurant management staff, allowing them to focus their efforts on the enhanced operating systems we are in the process of rolling out. With the full participation of our Fuddruckers team, we are focusing on finding opportunities to offer our customers the highest level of service and the best quality food. We also invested in repairs and maintenance, and upgrading equipment. The integration process has gone smoothly and we would like to thank our dedicated team for their hard work. We believe the steps we are taking at Fuddruckers will enhance the customer experience, the brand, and will lead to future growth.”

In concluding his remarks, Pappas said, “In order to complete the acquisition of Fuddruckers, we borrowed $51.3 million. We are happy to report that in just four months we have repaid $11.8 million, of which $2.0 million was paid down in the first fiscal quarter of 2011. We ended the fiscal first quarter with shareholder equity of $159.3 million, $39.5 million in debt, $1.8 million in cash and $9.7 million in availability under our credit facility.”

Operating Expense Review

Food costs rose approximately $7.7 million in the first quarter fiscal 2011 compared to the same quarter last year, due primarily to an increase in sales volume as a result of the Fuddruckers acquisition. Food costs as a percentage of restaurant sales rose to 29.7% in the first quarter fiscal 2011 from 26.9% in the comparable quarter last year due to lower menu prices, increased promotional activity and limited time offers at the Luby’s brand restaurants and higher overall food commodity costs.

Payroll and related costs in the first quarter fiscal 2011 rose $6.3 million to $25.0 million versus last year’s first quarter results. As a percentage of restaurant sales, payroll and related costs declined to 35.6% in the first quarter fiscal 2011 from 38.3% in the same quarter last year, primarily due to improved deployment of crew labor and field management, as well as lower restaurant labor costs as a percentage of sales at our Fuddruckers units.

Other operating expenses primarily include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, supplies, services, and occupancy costs. Other operating expenses rose by approximately $6.1 million compared to the same quarter last year, due to the Fuddruckers acquisition. As a percentage of restaurant sales, other operating expenses rose to 25.9% compared to 24.7% in the same quarter last year, primarily due to higher occupancy costs associated with the leased Fuddruckers locations, increased supply costs, and repairs and maintenance related to improvements in systems and processes at our Fuddruckers units, offset by lower utility costs and advertising expenses.

Depreciation and amortization expense rose approximately $0.6 million in the first quarter fiscal 2011 compared to the same quarter last year, due to the additional assets associated with Fuddruckers.

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 rose by approximately $1.0 million in the first quarter of fiscal 2011 compared to the same quarter last year due to additional overhead associated with Fuddruckers. Included in the first quarter of fiscal year 2011 are approximately $0.5 million in professional fees and expenses related to the integration of Fuddruckers.

Outlook

Although the Company believes the economy is showing signs of improvement, it remains cautious as do its customers. It hopes to gain further visibility in 2011. As we have reiterated before, the Company’s Fiscal Year 2011 profitability is contingent on same store sales growth as well as effectively managing our expenses. Fuddruckers is expected to be accretive to Luby’s overall profitability.