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Luby's Reports Fourth Quarter Fiscal 2011 Results

2011-11-10

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Luby's Restaurant sales were $105.3 million, an increase of $28.5 million compared to the same quarter last year. On a comparable sixteen-week to sixteen-week basis, restaurant sales grew 29.1%, to $99.1 million. During the quarter, same store sales declined 0.6% at the 96 Luby's restaurants compared to the same quarter last year. A decline in customer traffic was partially offset by a 1.7% increase in average customer spending. The 61 company-operated Fuddruckers and Koo Koo Roo locations added approximately $32.1 million to restaurant sales.

Luby's, Inc. (NYSE: LUB) announced its unaudited financial results for the fourth quarter fiscal 2011, a seventeen-week period, and for the fiscal year, a fifty-three week period, which ended on August 31, 2011. This year's fourth quarter and fiscal year included an extra week compared to last year's fourth quarter and fiscal year. Last year's results included thirty-one days of Fuddruckers' activity, as Luby's completed the acquisition of substantially all of the assets of Fuddruckers on July 26, 2010.

Fourth Quarter Review

Restaurant sales were $105.3 million, an increase of $28.5 million compared to the same quarter last year. On a comparable sixteen-week to sixteen-week basis, restaurant sales grew 29.1%, to $99.1 million. During the quarter, same store sales declined 0.6% at the 96 Luby's restaurants compared to the same quarter last year. A decline in customer traffic was partially offset by a 1.7% increase in average customer spending. The 61 company-operated Fuddruckers and Koo Koo Roo locations added approximately $32.1 million to restaurant sales.

Table 1: Same Store Sales by Quarter
	Q1	Q2	Q3	Q4	YTD

FY2011 Same-Store Sales (96 stores):	5.5%	2.7%	3.5%	(0.6%)	2.5%
FY2010 Same-Store Sales (95 or 96 stores ):*	(13.3%)*	(12.5%)*	(4.8%)	(0.5%)	(7.4%)

* 95 stores in Q1FY2010 and Q2 FY2010.

Note: Fuddruckers locations will not meet the Company's same-store sales definition until after 18 consecutive accounting periods, and thus are not included in the results reported above.

Table 2: Restaurant Sales (In thousands)
Restaurant Sales	Q4 FY2011 17 weeks Ended 8/31/2011	Q4 FY2010 16 weeks Ended 8/25/2010	Variance	%

Luby's Cafeterias (96 stores)	$ 73,160	$ 69,265	$ 3,895	5.6%
Fuddruckers and Koo Koo Roo (1)	32,098	7,477	24,621

Restaurant Sales	$ 105,258	$ 76,742	$ 28,516	37.2%

Restaurant Sales below adjusted to exclude the seventeenth week in Q4 (In thousands).
Restaurant Sales	Q4 FY2011 16 weeks Ended 8/24/2011	Q4 FY2010 16 weeks Ended 8/25/2010	Variance	%

Luby's Cafeterias (96 stores)	$ 68,856	$ 69,265	$ (409)	(0.6%)
Fuddruckers and Koo Koo Roo (1)	30,210	7,477	22,734

Restaurant Sales	$ 99,067	$ 76,742	$ 22,325	29.1%
(1) 58 stores at FY2010 end; 61 stores at FY2011 end.

Revenue from Culinary Contract Services rose to $5.6 million in the fourth quarter fiscal 2011 compared to $4.2 million in the same fiscal quarter last year. Adjusting for the extra week in fiscal 2011, revenue grew approximately 25% to $5.3 million. Culinary Contract Services operated 22 facilities as of August 31, 2011 versus 18 facilities at the end of the fourth fiscal quarter last year.
Store level profit, defined as restaurant sales less food costs, payroll and related costs, and other operating expenses, was$14.1 million in the fourth quarter of fiscal 2011, or 13.4% of restaurant sales, compared to $10.2 million in the fourth quarter of fiscal 2010, or 13.2% of restaurant sales. On a comparable sixteen-week basis, store level profit grew to $13.2 million, an approximate 30% increase versus last year's fourth quarter. Store level profit as a percentage of restaurant sales rose as reductions in payroll and related expenses exceeded increases in food and other operating costs as a percentage of restaurant sales.
In the fourth quarter fiscal 2011, Luby's reported income from continuing operations of $2.9 million, or $0.10 per share, compared to $1.1 million in the same quarter last year, or $0.04 per share. The 2011 results included (1) a $0.9 millionafter-tax gain on asset disposals, (2) a $0.2 million in after-tax expenses associated with professional fees related to the integration of Fuddruckers, (3) a $0.6 million decrease in the tax valuation allowance and (4) a $0.1 million after-tax reversal of an accrual for legal settlement costs. Last year's results included (1) a $1.4 million after-tax gain from auction rate securities that were redeemed at par value during the 2010 fourth quarter, (2) a decrease in the tax valuation allowance of $2.4 million, (3) $2.0 million in after-tax expenses associated with an accrual for a legal settlement and costs associated with the acquisition of Fuddruckers, and (4) $0.2 million after-tax non-cash asset impairment charge. The table below outlines the special items included in this year's and last year's results.

Table 3: Reconciliation of income from continuing operations to income (loss) from continuing operations, before special items (1,2)
	Q4 FY2011		Q4 FY2010
Item	Amount ($000s)	Per Share ($)	Amount ($000s)	Per Share ($)
Income from Continuing Operations	$ 2,930	$ 0.10	$ 1,137	$ 0.04
Fuddruckers legal and professional fees	240	0.01
Asset charges; (gain) loss on disposal of assets	(942)	(0.03)	192	0.01
Tax valuation allowance decrease	(580)	(0.02)	(2,359)	(0.08)
Gain in fair market value of Investments			(1,369)	(0.05)
Legal settlement accrual and Fuddruckers acquisition expenses	(139)	(0.01)	1,997	0.07
Income (loss) from Continuing Operations, before special items	$ 1,509	$ 0.05	$ (402)	$ (0.01)

(1) The Company uses income from continuing operations, before special items in analyzing its results, which is a non-GAAP financial measure. 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 income (loss) from continuing operations, before special items, to income from continuing operations, the nearest GAAP measure in context.
(2) Per share amounts are per diluted share after tax.

Chris Pappas, President and CEO, remarked, "We achieved our goal to be profitable in fiscal 2011 as we generated $2.9 millionin income from continuing operations. We also produced solid sales gains with a 2.5% same store sales increase for the year. We would like to thank our dedicated employees, whose hard work and dedication made fiscal 2011 a success.

"Our largest undertaking in fiscal 2011 was integrating Fuddruckers, its fifty-eight company-owned stores and its franchise network. With the first phase of the integration now complete, we feel confident that we have established a firm foundation to grow Fuddruckers. During fiscal 2011, we opened a smaller footprint prototype restaurant with a simplified menu in downtownHouston, bringing the world's greatest hamburger to downtown Houston. We started enhancing the look and feel of many locations and added new menu items as well as upgraded a number of the core menu items. We discussed opportunities with our franchisees to expand the Fuddruckers brand and enhance our operating systems. We would like to thank everyone involved in the successful integration including our customers, our employees and our franchisees.

"We made great strides in expanding our Culinary Contract Services opportunities during the past fiscal year. We believe we have achieved our growth by focusing on quality and offering our institutional clients a personalized touch to their service needs. We are an amenity that sets their facilities apart.

"During fiscal 2011, we generated $16.5 million in cash provided by operating activities, including $9.9 million during the fourth fiscal quarter. We were able to produce solid operating cash flow in fiscal 2011 due to our 2.5% same store sales increase, while keeping a close rein on expenses. As always, we will continue to focus on generating strong cash flow.

"During the fourth quarter, we relocated a 24-year old Luby's Cafeteria from an end of strip center location to a freestanding facility to gain greater visibility. We took the opportunity to enhance our facility using new and more innovative design elements from our prototype design, combining a family-friendly residential style atmosphere with our quality food and welcoming service. The open floor plan features abundant natural light with rich wood finishes and bronze accents. It's exciting to see the sales increase that a brand new facility brings to a concept.

"Due to our strong operating cash flow and our closed property sales, we have paid down almost $30 million of debt since we closed the Fuddruckers acquisition in July 2010. We ended the year with $21.5 million outstanding under our credit facility, down from $51.3 million when we closed the Fuddruckers acquisition. During the fourth quarter, we completed an amendment to our $50.0 million credit facility, extending the maturity date to September 2014, giving us increased financial flexibility.

"As always, we remain committed to maintaining a solid balance sheet. We ended the 2011 fiscal year with shareholders' equity of $165.0 million, cash of $1.3 million and $27.3 million in availability under our credit facility.

"After completing our fiscal 2012 planning and budgeting process, we are even more committed to growing our brands, both in existing and new markets. In fiscal 2012, we plan on opening at least three and up to five Fuddruckers locations. We are also in talks with our franchisees and expect approximately five to ten new locations to open within the 2012 fiscal year, including one in Mexico."

Operating Expense Review

Food costs rose approximately $8.3 million in the fourth quarter fiscal 2011 compared to the same fiscal quarter last year, primarily due to the sales volume from Fuddruckers restaurants. About $1.8 million of the increase is due to the extra week included in the quarter. Food costs as a percentage of restaurant sales rose to 28.4% in the fourth quarter fiscal 2011 from 28.2% in the comparable quarter last year due to rising food commodity costs and the impact of lower menu price offerings, primarily the "All You Can Eat" weekend breakfast program partially offset by favorable changes in menu mix. Fuddruckers restaurants results continued to be impacted by inflation in beef prices, which were up over 10% compared to the fourth quarter last year.

Payroll and related costs in the fourth quarter fiscal 2011 rose $9.5 million, to $36.6 million, compared to last year's fiscal fourth quarter results. Approximately $2.2 million of the increase can be attributed to the extra week. As a percentage of restaurant sales, payroll and related costs declined to 34.8% in the fourth quarter fiscal 2011 from 35.3% in the same quarter last year, primarily due to the inclusion of the Fuddruckers' labor costs, which are lower as a percentage of restaurant sales compared to Luby's Cafeterias. Combined restaurant management labor costs were up on a year-over-year basis due to an increase in the number of restaurant field management employees deployed into the restaurant units.

Other operating expenses include restaurant-related expenses for utilities, repairs and maintenance, advertising, insurance, supplies, services, and occupancy costs. Other operating expenses in the fourth quarter fiscal 2011 rose approximately $6.8 million, to $24.7 million, compared to the same quarter last year, due to the Fuddruckers acquisition. About $1.5 million of the increase is associated with the extra week. As a percentage of restaurant sales, other operating expenses rose to 23.5% compared to 23.3% in the same quarter last year, primarily due to higher occupancy costs associated with the leased Fuddruckers locations and increased utilities, supplies and services expenses. Due to the focus on economical local marketing initiatives, marketing and advertising expenditures continued to be lower than last year.

Depreciation and amortization expense rose approximately $0.4 million in the fourth quarter fiscal 2011 compared to the same quarter last year, due to the addition of the Fuddruckers assets acquired in July 2010.

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 declined approximately $0.3 million in the fourth quarter fiscal 2011 compared to the same quarter last year, as last year's results included a legal settlement accrual and costs associated with the acquisition of Fuddruckers. As a percentage of total revenues, general and administrative expenses declined to 8.4% in the fourth quarter of fiscal 2011, compared to 12.1% in the same quarter last year. Included in the expenses for the fourth quarter of fiscal year 2011 are approximately $0.3 million ($0.2 million after-tax) in professional fees and expenses related to the integration of Fuddruckers.

Fiscal Year Review

Restaurant sales increased $95.0 million, to $325.4 million, during fiscal year 2011. Excluding the fifty-third week, restaurant sales were $319.2 million. Fuddruckers contributed sales of $93.1 million in fiscal 2011 compared to $7.5 million last year. Luby's Cafeteria restaurant sales rose $9.4 million during the period. Excluding the impact of the extra week, Luby's Cafeteria restaurant sales rose $5.1 million, or 2.3%.
Luby's Culinary Contract Services division generated $15.6 million in sales during fiscal 2011 compared to $13.7 millionlast fiscal year.
Income from continuing operations was $2.6 million in fiscal 2011, compared to a loss of $0.6 million in fiscal 2010.
Store level profit rose to $41.2 million during fiscal 2011, up from $32.8 million in fiscal 2010. Excluding the extra week, store level profit was approximately $40.3 in fiscal 2011. As a percentage of restaurant sales, store level profit declined to 12.7% in fiscal 2011, compared to 14.2% in fiscal 2010.

Table 4: Reconciliation of income (loss) from continuing operations to income (loss) from continuing operations, before special items (1, 2)
Item	FY2011		FY2010
	Amount ($000s)	Per Share	Amount ($000s)	Per Share
Income (Loss) from Continuing Operations	$ 2,583	$ 0.09	$ (612)	$ (0.02)
Fuddruckers legal and professional fees	1,017	0.04
Asset charges; net gain (loss) on disposal of assets	(886)	(0.03)	(424)	(0.01)
Gain in fair market value of Investments			(1,080)	(0.04)
Legal settlement accrual and Fuddruckers acquisition expenses	(139)	(0.01)	2,761	0.10
Tax valuation allowance decrease	(479)	(0.02)	(1,961)	(0.07)

Income (loss) from Continuing Operations before Special Items	$ 2,096	$ 0.07	$ (1,316)	$ (0.04)

(1) The Company uses income from continuing operations, before special items in analyzing its results, which is a non-GAAP financial measure. 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 income from continuing operations, before special items, to income from continuing operations, the nearest GAAP measure in context.
(2) Per share amounts are per diluted share after tax.

Outlook

In fiscal 2011, Luby's reinforced its foundation for growth by integrating Fuddruckers, developing new prototypes, and establishing its Culinary Services as a top-tier operator in our core market. In order to leverage that foundation, we project that our capital expenditures will be within the range of $15 to $20 million in fiscal 2012. Included in that figure are several upgrades and refreshes to both restaurant brands. As part of that capital budget, we plan to open one combination Luby's/Fuddrucker's standalone facility, as well as three to five new Fuddruckers during fiscal year 2012.

We currently expect our same store sales to grow by 0.25% to 1.0% and our earnings per share for fiscal 2012 to be in the range of $0.09 to $0.12. We remain cautious regarding possible consumer reactions going forward to prevailing unemployment levels and inflation.

Our objective remains to grow cash flow from operating activities and profitability for the full fiscal 2012. Profitability is contingent on same store sales growth as well as effective management of our expenses. Food commodity cost increases will continue to negatively impact our margin, absent significant increases in guest counts and favorable menu mix tilted toward higher margin offerings.